How to analyze the forex market

How to analyze the forex market

Submitted by adil on Fri, 06/06/2014 - 13:32

Learn to Analyze the Market Like A Pro!

How can a person properly analyze the market conditions? It is a really hard task, one that even professionals find hard to perform. However, it is often a matter of judgment rather than a lack of proper methodology that is the reason for failure. Here we are going to review some methods that can help you achieve better understand the trends on Forex.

The different types of analysis

A Forex trader must always monitor the conditions of his currencies. They are changing almost every second and opportunities come and go in a matter of seconds too. The analysis you can do can be of two basic types – technical and Fundamental. The first one is all about charts and tools, while the second is about more about macro-economic information that is based on news. It is arguable which one is better – each of them has its merits depending on the term of the period you want to analyze.

The fundamental analysis

It is the classic way to stay tuned about changes by monitoring a predetermined set of factors that affect the market conditions. These would things like interest and unemployment rates, the GDP of a nation, the PPP – purchasing power parity, the Gini coefficient and many other purely economic indicators. If you are trying to analyze the relationship between the euro and the dollar for example than you would be interested in information about average ratios in the Eurozone and the States and how do they stand against each other. Also predictions based on how these indicators will change can be crucial, because their healthiness determines directly the value of the currency at hand.

The technical analysis

This is a type of analysis that can be done automatically. It is all about past data and the trends that can be observed in it. The price movement of different currencies in the past can be related to their value in the future, and this is on what the movement is based. Either you or some software analyzes technical indicators and gives a statement on whether to hold, to buy or to sell. If you want to use the software you will have to carefully research what market conditions you want it to wait for and how to interpret the different variations in which they can occur. The big plus to this method is that it is working with purely statistical data and emotions and human judgment are not in the way of prudency.

So what is the best way?

Both analysis are useful to a trader on Forex. The technical one is more appropriate if you want to do short term strategies, as it is about specific market conditions. With the fundamental one on the other hand we are talking about indicators that have relevant change in the long term period – at least a year. However with the second one you will have more time to predict how the market will be developing and your plans will include a lot of waiting. The best approach to analyzing the market is to use both methods and combine them. A timely thing to do, but invaluable when it comes to money.