Author: Samuel Lowes
Fund Manager
Samuel Lowes

How to Use Analysis When Forex Trading

Market Analysis

Forex is known as being a highly volatile trading medium and can be hugely affected by world political and economic events. Therefore, while it is not always possible to predict such events, being able to achieve a level of understanding of their impact is essential.

It is easy to find copious amounts of information on any subject using the Internet and the abundance focused on Forex analysis is no exception. Naturally, it is always wise to be cautious with this information as much is incorrect or even designed to mislead.

If you are or intend to become a Forex trader, it is critical for you to develop an understanding of the ways to analyse the market and to try a variety of tools until you find the best ones for you.

In this guide, you will learn:

  • Popular methods of technical analysis
  • Why analysis is crucial for retail traders
  • The tools you can use for better awareness

What is Technical Analysis

In simple terms, technical analysis is the methodology used by Forex traders to study the movement of currency pair prices. However, this needs to go a little deeper than just occasionally consulting charts or graphs.

There are several ways in which you can analyse the Forex market. If you are a technical analyst, you will seek to find recurring patterns in the market and to pinpoint the reasons for them. On the other hand, a fundamental analyst will look more towards the underlying political or economic issues or events that affect currency supply and demand.

On some occasions, you may have made a trade using sentiment analysis. Literally, this is a personal viewpoint on how the market will move, based on nothing but ’gut feeling’.

Using one version alone may not provide adequate information and using only the third is quite a dangerous thing to do. It is no surprise that the majority of Forex traders will develop their version of analysis using a balanced combination of all three methods.

Another practice some traders also employ is weekend analysis, which takes place while the Forex markets and currency movement are dormant. It is an excellent time to reflect on the events of the previous week, their effect on price movements and to put together a plan for the following week’s trading.

Market price action reflects all available information and the market price movement is comprised of three main trends.

What Affects Asset Prices

Forex Trading Analysis

The main factors which can affect the value of a country’s currency at any given time are political events, recession, inflation rates (market inflation), interest rates and unemployment figures. It is by no means an all-encompassing list and a significant news event or natural disaster can also have far-reaching effects on a country’s economy and latterly, its currency value.

Most methods of analysing cause and effect trace back to a theory created by Charles Dow, over 100 years ago. Although this is a complex subject in its own right, briefly the Dow Theory states:

Market price action reflects all available information and the market price movement is comprised of three main trends.

Put into simple terms, these comprise Accumulation, Public and Excess. Accumulation is the starting point at which well-informed investors begin trading, with their peers gradually following suit.

This initial interest can develop into the Public stage, the point where there is mass interest in a specific investment. Comes the point where saturation occurs and the opportunity devalues. At this Excess stage, the original investors will begin to sell their holding.

Although you may find this a little complicated to follow, the facts uncovered by Dow still hold and provide proof that careful analysis of cause and effect within the Forex market is the key to astute trading.

Why Analysis is Important

A successful Forex trader will recognise that there are four essential steps within the research/analysis process. By routinely using a blend of technical, fundamental and sentimental analysis, they will start to come naturally.

The first step is understanding the market sentiment and what is driving it. Political, social and economic events are the main factors which affect Forex in the short-term.

Next is charting; this is more concerned with historical events and their effect on economies. Usually, a positive driving force will raise the value of a currency and a negative one will devalue it.

At this point observing from all aspects is critical. Take account of current and historical Forex trends, but also keep a close eye on other trading instruments.

Lastly, it is all down to timing; you already have all of the information and this final decision often comes down to your instinct alone.

How to Analyse the Markets

Thanks to the Internet, there are many ways to analyse. Newsfeeds provide instant updates (notifications) to a PC or mobile device so that traders on the move can quickly review a situation and act upon it. Notifications are particularly crucial to day traders involved in scalping.

Forex signals work similarly, but provide suggestions for making a trade. They can be obtained free or as part of a subscription service. Paid signals are usually derived from more than one source and could be a more authoritative guide.

Lastly, there are also robot signals, which are generated by software downloaded to your device.

Forex charts are the most popular form of technical analysis used by Forex traders. A line chart is the simplest to interpret and plots the closing price of a specific currency pair over a selected period. They can be used to simplify information and to glean historical data that will add to your strategy.

Bar charts show more information, which includes the opening and closing prices, as well as highs and lows. They are used to analyse the movement of a currency pair over a selected period and although a general pattern is visible, the vertical lines are not linked, meaning that each line is an individual ‘snapshot’ of the market at that point.

Candlestick charts are the most complete and widely used form of Forex analysis in the world. Although they are (initially) a little more challenging to interpret, they contain far more information than the other types of chart. They are generally used to monitor the progress of a currency pair in real time.

There is no single or ‘best’ way to analyse the Forex market. The only way is to use a balanced and systematic approach using as many tools as you feel comfortable with and which will combine to assist and improve your progress (and hopefully success) in Forex trading.

Meet The Author
Samuel Lowes
Samuel Lowes
Fund Manager

Contributing to the website since 2012 we are one of many consultancy projects Samuel works on. With 38 years of experience in finance, insurance and foreign exchange his combined knowledge makes him an effective operator. Learn more.

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