Analysis on the Forex Market

To interpret the situation on the market correctly and figure out what some actions and events will cause, you need to learn to "read", group and analyze information, received from external sources. To predict future currency fluctuations, you must learn two types of analyses: technical and fundamental.

Let us find out what are the features of each one of them.

Fundamental Analysis

This type of analysis is based on the analysis of economic and political news and their influence on the changes in currency rates. It is a set of actions, and their main task is to predict the behavior of the prices on the Forex market. The basis of these actions is the consideration of the fundamental data of the countries, whose currencies are involved in transactions. It is quite difficult to fulfill this analysis, because the same factors may have different influences on the situation. Therefore, the consequences may differ as well. The success of the fundamental analysis depends on the clear understanding of the impact of its components on the currency market.

Fundamental analysis considers in consideration the following list of indicators:
  • the interest rates of central banks;
  • the economic policy of the state;
  • the political situation;
  • the characteristics of economic growth;
  • the indicators of the trade balance;
  • the inflation rates;
  • state solvency;
  • investor sentiment;
  • the competitiveness of the product;
  • consumer sentiment;
  • state of the real estate market;
  • state of the labor market;
  • other indicators.

Fundamental data is published in the form of indexes and often can be reviewed and reevaluated. When estimating data, the comparison of previous and current indexes happens and the dynamic and economic processes for several years are analyzed. However, it is not enough just to have the necessary data: it is also vital to have analytical skills to associate information and the possible consequences that it will cause. Analytical skills may be developed through constant trainings because only professionals can analyze the situation and make the most effective decision in a short period.

The conducting of fundamental and technical analyses must be the mandatory part of every trader's work.

Fundamental analysis is the process of reviewing the global economy news, careful studying them and the choice of the right algorithm of action. Events that happen in the world, influence position of the currency on the Forex market. For example, the tense situation among the banks of one country may result to a drop of the currency of this country. Fundamental analysis requires patience and time. The feature of the analysis is its orientation on long-term deals (year, half a year, quarter). That is why some traders refuse to conduct this analysis. Although having understood its basics and having read a book on macroeconomics, a powerful tool for the prediction of future situations will be at your disposal.

Technical Analysis

This is the method of currency rate prediction, based on the analysis of charts, using technical indicators. This type of analysis has been an irreplaceable instrument in trader's work and has been used for many years. It helps determine the future direction of the price movement based on historical data. The advantage of this analysis is the opportunity to use it in short-term and middle-term forecasts, from operations carried out within one day to transactions, that last for several weeks.

Technical analysis is based on three axioms:
  • Market considers everything. Factors that influence the market has already been reflected in the price and determined the behavior of market participants.
  • Price moves in a specific direction. Any price change has one of three directions – trends. The trend may go up (rising or "bullish"), down (or "bearish") or may be "flat". The task of the trader is to identify the trend in its infancy and follow it while trading until it changes.
  • Market has a good memory (history repeats). The pattern of the previous situations is reflected in the present. Laws, that influence the market remain unchanged.

Charles Dow (1851-1902) is called the "father" of technical analysis. In the late 19th century he published a series of articles in which he outlined his observations of the stock market. His observations formed the basis of the technical analysis. Technical analysis includes methods that lets one figure out the most beneficial moment to enter the market. All the methods are based on the evaluation of the trade volume and price patterns. Instruments, which help in making decisions, are graphical ways to display the information (candlesticks, bar charts, line charts and other less popular ones) and other technical indicators, based on historical price data. All the signals provided by indicators are advisory. The use of indicators, together with other instruments, that lets one conduct market analysis, will make your work more effective.

The most effective option is to combine fundamental and technical analyses. Of course, it is quite difficult, but this will help you significantly increase chances to get stable income from trading on the currency market. Fundamental analysis is based on the search of the reason unlike technical analysis, that does not look for the reason but observes what is going on with the currency rate. Тhus, both analyses are intended to complement each other.

Conducting fundamental and technical analyses must be the mandatory part of every trader's work. That is the only way that a trader would be able to identify the sequence of actions and make the right decision.

It is quite difficult to analyze the situation on the foreign exchange market. To make the work of a trader more comfortable, we have such information as Market News, Economic Calendar and Interest Rates to conduct fundamental analysis. The trading platform MetaTrader 4 has a wide choice of instruments to conduct technical analysis.