Forex traders mainly use two types of analysis in order to determine future movements in the currency market. Fundamental analysis looks at economic announcements in order to deduce the health of a country’s or region’s economy. Alternatively, technical analysis examines price action and chart patterns in order to predict price movements in the forex market. The third type of analysis is known as market sentiment which looks at the overall attitude of market participants regarding the strength of a currency.
Fundamental Analysis
Fundamental trading in forex is similar to the stock market in that fundamental traders look to news reports regarding a country’s economic strength and financial growth. Relevant news reports for fundamental traders include economic data as well as political events. Some of the most important economic data for fundamental analysis are interest rates, employment statistics,
economic growth and trade reports and commodity prices.
Technical Analysis
Technical analysis is based upon the assumption that historical price movements can be used to predict future market fluctuations. Through examining patterns in price action technical traders attempt to determine if a currency pair will move in a certain direction and to what price point the currency pair may stop moving in that particular direction. Technical traders also utilize various technical indicators which are data sets derived through application of a formula to the price data of a currency pair.
Market Sentiment
The crowd psychology of forex participants as a whole is known as market sentiment. This type of market analysis looks at a broad range of factors and evidence to determine the attitude of the market regarding the value of a currency. For instance, increasing prices would point to a bullish sentiment in the market, while decreasing prices would suggest a bearish market sentiment. Many traders look at the tone of news headlines and media reporting to determine market sentiment.
Most forex traders utilize a combination of these three types of market analysis when making trading decisions. However, some traders may place heavier emphasis on one type of analysis over the others. On the other hand, some traders make decisions based almost solely on either fundamental or technical factors.
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Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
- http://www.investopedia.com/university/forexmarket/forex6.asp
- http://fxtrade.oanda.com/learn/intro-to-currency-trading/fundamental-analysis/
- http://www.futuresmag.com/2011/03/31/top-five-forex-fundamentals?page=2
- http://www.investopedia.com/terms/m/marketsentiment.asp
- http://www.investopedia.com/university/forexmarket/forex7.asp
- http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_technical_indicators_and_oscillators
