- Traders employ three primary types of forex analysis to predict market movements and assess trends.
- Traders typically choose one or combine multiple analysis methods based on their personality and trading style.
- Practicing trades through an analytical approach in a forex practice account can be valuable.
THE 3 MAIN TYPES OF FX MARKET ANALYSIS:
1) Fundamental Analysis:
Fundamental analysis in forex revolves primarily around the interest rates of currencies, as they have a significant impact on the market. Other fundamental factors, such as gross domestic product, inflation, manufacturing, and economic growth, are also considered. However, their importance lies in how they affect a country's interest rates.
When examining fundamental releases, traders should consider how they might influence future interest rate movements. In a risk-seeking environment, investors are attracted to currencies offering higher interest rates, leading to increased investment. Conversely, during risk-averse periods, money flows from high-yield currencies to safe-haven currencies.
2) Technical Analysis:
Technical analysis in forex involves analyzing patterns in price history to identify optimal entry and exit points for trades. It is one of the most widely used analysis methods in the forex market.
Given that forex is a large and highly liquid market, price action on charts provides insights into hidden levels of supply and demand. By reviewing price charts, traders can also identify currency pairs that exhibit strong trends. For example, the GBP/USD chart below illustrates the strengthening of the US dollar against the British pound.
In simpler terms, technical analysis focuses on studying historical price patterns to determine favorable trading opportunities, taking into account factors like support and resistance levels, trend lines, and chart indicators.