The volatility of the Forex market is quite a specific thing, and the market itself has a really volatile and complex “character”. It is not uncommon for a trader to fail to predict certain situations in the market – and professionals know about it. And in order to reduce the number of such situations to a minimum, different types of market analysis are used. Many of them have been created during the existence of Forex, but the classics always come first. The most popular types of analyzes in the currency markets are fundamental analysis and technical analysis. They can be effective on their own, but they work even better when paired.
Technical and fundamental analysis of the Forex market
As noted above, fundamental and technical market analysis are the most popular and frequently used types of analysis in the Forex market. Without them, regular profit is impossible. Each trader chooses independently – he wants to analyze the market in only one of the ways, or his strategy is to focus on using several at once.
Is it possible to analyze the market and predict its behavior?
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It is impossible to predict with 100% accuracy where and how the Forex market will move. Forex is a huge decentralized market where millions of transactions are processed every day, and the participants are not only private traders and investors, but also the largest international banks and companies.
There is no single formula for predicting the rate of a particular instrument. But there are several important factors that you should always pay attention to: economic growth, the state of geo- and monetary policy, export and import indicators, the state of interest rates, and so on.
A trader who follows the events in the world, monitors the macro and micro economy is able to independently recognize the trend – one of the most important abilities for traders in the market. Let’s take a closer look at how analysis helps in trading.
Technical analysis - basic techniques
The basis of technical analysis is the determination of the price and its behavior in the future based on the study of historical data. When using technical analysis, it is assumed that markets are cyclical in nature, movements are periodically repeated, which means that the main task of a trader is to determine this pattern of cyclicality (trading signals). As the “father” of modern technical analysis, Charles Dow, once said, “Price takes into account everything.”
Does Forex Technical Analysis Work? Yes, because in its essence it is the art of searching for patterns, finding the point of entry and exit from transactions with the highest probability of success, which means with guaranteed profit or minimal losses. In addition, technical analysis helps to improve your trading discipline and slightly mitigate the influence of emotions in a trading plan. Although this system is not 100% perfect, it helps to create and track a trader’s trading plan.
Why doesn’t technical analysis work? Perhaps you misinterpreted the indicator used or made a mistake in its installation – read the instructions carefully again and check everything. Or there is another reason – the subjectivity of the analysis. For example, the same chart with the same indicators and indicators can lead two different traders to completely different thoughts. In this case, it is worth checking your decisions with professionals.
Examples of indicators to use in technical analysis:
First of all, these are trend indicators that smooth out price data (often using a moving average). Such indicators are less likely to give false signals, but they are distinguished by a significant delay, so such indicators work best in long-term strategies.
The most famous representatives of trend indicators: moving average, Bollinger bands, ADX.
Oscillator indicators are designed to help you instantly react to price changes, but this makes them quite problematic to use in an established trend – they can create false signals. But at the same time, oscillators are perhaps the best indicators in the moments of a flat in the markets.
The most famous representatives of oscillators: MACD, RSI, Stochastic.
Volume indicators, as the name implies, use volumes in their calculations, and this should not be forgotten at all. In Forex, volumes mean the number of ticks (price changes) for a certain time interval. Such indicators will be a great addition to other types of indicators.
The most famous representatives of oscillators are the classic volumes indicator, the cash flow index, and the balance sheet volume (OBV).
Fundamental analysis
In the case of fundamental analysis, it is considered more and more globally – politics, economics, social forces that can affect the supply and demand of the selected asset, whether it be a currency pair or company shares, are affected.
Fundamental analysis in the foreign exchange market is based on a simple understanding: if a country has a strong economy, in which there are no problems, the demand for currency from market participants will be high, which means that the rate will move to growth. One of the most important fundamental news for the market is the news regarding the monetary policy of the countries, in particular the decision on interest rates – that is why they are always marked with the maximum importance in the calendars of traders. But besides rates, different data may be important, depending on the chosen instrument. For example, for currencies, these are reports on GDP, on the budget, unemployment rate, and so on; for stocks, these are quarterly reports of companies or changes within companies.
If a trader decides to use fundamental market analysis, it is worth remembering an important thing – by itself it cannot be a determining factor in short-term movements, it can and should even be considered from a broader point of view.
How to use Forex fundamental analysis? Always keep an economic calendar at hand and follow it – it is the main source of information, at the same time, it is always able to tell you when and what news to expect.
For example, to understand what the main trend is for the euro-dollar pair, you can look at the economic data coming out in the eurozone and the United States. The most striking example is the publication of the American report NFP (Non Farm Payroll), showing data on job creation outside the agricultural sector. Depending on what data comes out, you can get an idea of the underlying trend in the price movement of the pair. By the same principle, you can predict the trend for indices and stocks.
Applicability of technical and fundamental analysis in robots
Robots are very popular in trading today. Thanks to their non-emotional and technical abilities to work 24 hours a day, robots make trading for traders not only easier, but also more profitable. At the same time, robots are able to process a huge amount of information at a speed that is not available to humans.
Technical analysis for robots is the basis, it has been really mastered to perfection. At the same time, with the right settings, the robot is able to accurately place orders within the framework of the program embedded in it, it will never get tired, which means it can track signals from indicators around the clock.
As for fundamental analysis, this is just one of the shortcomings of robots, since they are not at all strong in it. At the moment, the program is not able to take into account the influence of factors such as speeches by heads of state or the development of vaccines during a pandemic. And if something unexpected happens, the program can stall, acting according to an already well-established scheme, without adjustments for third-party circumstances. That is why, despite the effectiveness of robots, it is important to continue to periodically independently monitor the situation on the market.
Technical and fundamental analysis is the basis of regular profits in the Forex market. It does not matter whether you use your own knowledge and experience or prefer to resort to the help of robotic advisors – thanks to the analysis, you can ensure earnings in any market condition. Use all types of analysis and earn with a reliable broker.
