There are three basic ways to develop and analyze ideas for the forex market. Let’s take a look at them below.
Forex traders who study price movement is the basic fundamentals to technical analysis. It’s like the old saying about how history tends to repeat itself. Traders look at historical price movements and determine trading conditions.
Theoretically, price reflects the current market information. If a price level held as a key support or resistance in the past, traders will look out for it and base their trades on this historical price level. Similar patterns are looked for that were formed in the past, and traders believe these patterns will repeat themselves.
Charts are used in technical analysis because they are the easiest way to view the markets historical data. Spotting patterns and trends is easy with graphs and charts. Technical analysis is also very subject as everyone will have a different viewpoint.
Analyzing social, economic, and political forces that may or may not affect supply and demand when looking at the forex market is fundamental analysis. Currency exchange rates are determined by supply and demand. However, there are many factors that affect supply and demand.
There are many factors to look at when determining how well a certain country’s economy is doing. It is vital to understand the reasons why certain events affect the economy, and how they affect it. For instance, if a country’s unemployment rate decreases, how does it affect the economy and monetary policy.
A country’s currency should strengthen if the current or future economic outlook is good. Foreign businesses and investors will invest in a country’s currency when that country’s economy is good. They need that country’s currency to obtain assets.
Let’s say that the Japanese economy was improving. The yen would then be gaining strength. Raising interest rates might be needed to control inflation and growth.
Yen-denominated financial assets are more attractive with higher interest rates. Investors and traders have to get their hands on some yen to obtain these assets. The value of the Japanese yen will likely increase as a result.
Theoretically, price action should reflect all available market information. However, this isn’t so simple and true. Each trader forms their own opinion on why the market is moving the way it is. This is why sentiment analysis is important. Positions taken up reflect each trader’s thoughts and opinions. Regardless of what information is out there, this helps form the overall sentiment of the market.
You can’t move the forex markets in your favor no matter how strongly you feel about a certain trade. This is true for retail forex traders. Sentiment analysis needs to be performed so you can decide for yourself how the market is feeling. The market can be bearish or bullish, and it’s up to you how you incorporate this into your trading strategy.