Introduction to Forex Analysis

Forex analysis is the examination of different factors that cause a rise & fall in the currency value. Learn the types of analysis with examples & tools.

Forex market analysis is the basis of trading currencies. Without analysis, one cannot trade in currencies. Many people think analysis plays a crucial role in trading, while many feel that analysis is overrated. Nevertheless, in this article, we will understand the concept of forex analysis with its types, examples, pros, and cons.

What is Analysis?

The analysis is the process of organizing in-depth examination and evaluation of theoretical and statistical data to make effective decisions.

It is a universal process used in almost every field, including finance, research, education, sales, marketing, etc.

What is Forex Market Analysis?

Forex analysis is the process of evaluating and examining different factors that directly or indirectly cause a rise and fall in the value of currencies.

In the finance world, especially in the forex market, analysis plays a crucial role. One can make the buying and selling decision based on analysis.

Knowingly or unknowingly, every trader makes trade decisions based on analysis. It can be in different forms by studying historical data, watching economic events, or following the crowds.

Types of Analysis

Traders use different methods for analyzing the trading market conditions. However, there are three major types of analysis in forex; let us understand the concept of each analysis with examples.

Fundamental Analysis

Fundamental analysis is the process of analyzing the fundamental factors of the country to make trade decisions. It may include economic, political, social, physical, and technological aspects of the country that impact the currency value.

A currency is the representation of a country; the stronger the country, the stronger the currency, and vice versa. Change in fundamentals causes changes in the exchange rate of a currency pair.

Therefore, trader watches these fundamentals and analyze what impact that makes on the currency price, and based on their prediction, they make the buying and selling decision.

Inflation, Gross domestic product, Interest Rates, Import export reports, Consumer Price Index, Retail Sales, Housing prices, and employment reports are some popular fundamental analysis tools.

Fundamental Analysis Example

Suppose a trader trades in a USD/GBP pair. A report has been released according to which the consumption of the products and services of USA is increasing in Britain and is all set to rise further.

It is positive news for the USD, which means that the price of US Dollars is expected to rise against Great Britain’s Pounds. So, the trader decided to buy one mini lot that is 10,000 units of USD/GBP pair at the exchange rate of 0.79.

The market moves in favour of the trader, and the price reaches 0.82, which means his profit is 300 Dollars (0.82*10,000-0.79*10,000).

Technical Analysis

You may have heard of a popular phrase that number don’t lies, and technical analysis is based on this concept only. Technical analysis is the evaluation of historical data and price patterns to make trade decisions accordingly.

The idea behind this forex analysis is that the financial market is repetitive, so the price patterns are. Traders watch historical price patterns, expecting that the price will move in that pattern during similar market conditions.

Traders continuously monitor chart patterns and use different technical analysis indicators to identify trading opportunities. One can identify pivot trade points like entry, exit, stop loss, take profit, support, and resistance levels using it.

One of the key pros of this analysis in forex is one can use automated tools to organize it effectively. Also, numerous charting platforms and software are available to conduct it. However, it may require knowledge of complex chart patterns and indicators.

Moving averages, Moving average convergence divergence, Stochastic Oscillators, Bollinger Bands, Fibonacci retracement, Ichimoku, and Relative Strength Index are some popular technical analysis tools.

Technical Analysis Example

Here is an example of technical analysis for a better understanding. Suppose a trader uses support and resistance, the price of the EUR/USD pair. You have spotted strong support at the level of 1.1128.

It means that you have found out that whenever the price reaches that level it takes a reverse and starts moving in the upward direction. So the price reaches that level, and you have bought the pair.

Now, suppose the price increases and reaches 1.1135. In this case, you have made a profit of 7 pips in forex through this trade.

Sentimental Analysis

The third analysis focuses on the perception of the market rather than the statistics or fundamentals. Under this analysis, traders analyze the opinion or mood of the market for making trade decisions.

Whether it is the forex market, stock market or any other financial market, the conditions are highly influenced by the fact that what the majority of people think.

Positive perception reflects the belief of the majority of people in the asset, while negative perception reflects the disbelief in the asset.
Optimism results in an increase in an asset’s price, while pessimism results in a decrease in an asset’s price.

You may have seen the majority of people investing in gold, as people believe in the safe haven asset. Similarly the major stocks of the company stay in demand due to its popularity. That is because of positive sentiments of markets towards the asset.

Social media platforms like LinkedIn, Telegram, WhatsApp, Facebook, and Twitter, Trading platforms like Meta Trader and Trading View, and news and analysis platforms like Investopedia are some popular platform for analyzing and interpreting the sentiment of the market.

Sentiment Analysis Example

Suppose a trader trades in EUR/GBP Pair. The market sentiment regarding this pair is strongly positive. The majority of people believe that the value of EUR is all set to rise against GBP.

Even on social media platforms like Twitter and Telegram, he observes bullish sentiments of traders regarding the pair. So, considering the positive market sentiment, he decided to buy the standard lot of the pair at the exchange rate of 0.87.

His analysis became true, and the price of the pair rise. The trader exited from the trade at 0.90. So his profit from the trade is 3000 Euro {100,000*(0.90-0.87)}.

Wrapping Up

We had an indept study about the types of analysis in forex with example and their tools. However, these analyses are not limited to the forex market; you can use these techniques while trading in gold, stocks, cryptocurrencies, indices, and many other financial products.

Also, if you are wondering about the best forex analysis method to trade, then it depends on different factors like time frame, strategy, risk, etc.

Technical analysis is suitable for day traders and scalpers, while fundamental and sentimental analysis is suitable for position and swing traders.

However, depending on a single analysis method is not a good idea because all three historical price patterns, market opinions and fundamental factors have a significant impact on trading.

These factors can change the entire market condition, and one may suffer a huge loss. So, it is viable for traders to combine all three analyses to make trade decisions effectively.