There are three main ways to analyze Forex price action and to predict if a currency pair will rally or drop. The different methods discussed in this article have their pros and cons, but they are all handy in determining which trade setups have higher odds of winning. You can base your choice of analysis on your preference and skills, but you can also try to use all methods together in making trades.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
Fundamental analysis also watches monetary policy of central banks. This has a direct effect on currency value because it has to do with the return on holding a currency and the amount of cash in circulation. With that, it impacts the supply and demand of the currency and therefore its price. Political and environmental factors could also play a role in fundamental analysis because these usually have an indirect impact on economic activity.
Second, there's technical analysis. This kind of analysis takes a look at past price behavior and uses these patterns in predicting how price will fare in the future. To be specific, technical analysis is involved with chart formations and candlestick patterns, which are both very useful in predicting future price movement.
Technical indicators which are placed on forex charts are also part of technical analysis. Leading and lagging indicators are the typical ones being used and these include the RSI, moving averages, or Bollinger Bands. You can combine the use of different indicators to provide early signals and get confirmation from others. Technical traders also look at inflection points or support and resistance levels in analyzing price action.
The third kind of forex trading analysis is sentiment analysis. With this method, a trader takes a look at how bullish or bearish markets are. It also involves looking at risk appetite, which is a gauge of how risk-hungry or risk-averse traders are.
When risk is on, traders tend to go for higher-yielding currencies which carry more risk. When risk is off, traders usually buy lower-yielding currencies which carry less risk, such as the dollar or yen. The Commitment of Traders report is a useful tool in identifying if large speculators or retail traders are bullish or bearish on particular currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
Fundamental analysis also watches monetary policy of central banks. This has a direct effect on currency value because it has to do with the return on holding a currency and the amount of cash in circulation. With that, it impacts the supply and demand of the currency and therefore its price. Political and environmental factors could also play a role in fundamental analysis because these usually have an indirect impact on economic activity.
Second, there's technical analysis. This kind of analysis takes a look at past price behavior and uses these patterns in predicting how price will fare in the future. To be specific, technical analysis is involved with chart formations and candlestick patterns, which are both very useful in predicting future price movement.
Technical indicators which are placed on forex charts are also part of technical analysis. Leading and lagging indicators are the typical ones being used and these include the RSI, moving averages, or Bollinger Bands. You can combine the use of different indicators to provide early signals and get confirmation from others. Technical traders also look at inflection points or support and resistance levels in analyzing price action.
The third kind of forex trading analysis is sentiment analysis. With this method, a trader takes a look at how bullish or bearish markets are. It also involves looking at risk appetite, which is a gauge of how risk-hungry or risk-averse traders are.
When risk is on, traders tend to go for higher-yielding currencies which carry more risk. When risk is off, traders usually buy lower-yielding currencies which carry less risk, such as the dollar or yen. The Commitment of Traders report is a useful tool in identifying if large speculators or retail traders are bullish or bearish on particular currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
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