A large part of the strategies used in the FX market is based on different types of analysis conducted on the market to understand the market movement. Perhaps the two most important ways for analysis includes Fundamental analysis and technical analysis. Each of these methods can be used in a certain way for the identification of market trends and can assist in making reasonably accurate predictions about future market behavior.
How is Fundamental Analysis Applied on the Forex Market?
Here, the main focus is on the fundamental reasons which impact market direction. This is drastically different from technical analysis which focuses only on the study of market action and its past performance. In Fundamental analysis, the focus is on macroeconomic indicators such as rates for inflation, interest, unemployment, economic growth, or any political issues of note which can adversely affect financial markets. Thus, it can be used for making trading decisions. This type of analysis is usually conducted on a longer timeframe as the data they examine are generated much slower than the price and volume data used in technical analysis.
Trading with the help of Fundamental Analysis
Using economic data for trading
Economic data is held in high regard when it comes to fundamental analysis in the forex market. Almost all major nations release economic data, giving a glimpse of their economic growth. As economic growth can directly result in a strengthening currency, traders seek outgrowth because of the trading opportunities it provides. The inverse is also true; bad economic growth numbers can be indicative of a weakening currency.
In this context, the GDP data holds the utmost importance. However, the nature of markets is such that it doesn’t wait for GDP release which usually comes out on a quarterly basis. Instead, the market reacts to the incremental flow of data from economic indicators throughout the month, and anticipate what those numbers mean for the GDP. Other economic data one can use for trading forex include inflation data, industrial and manufacturing data, consumer confidence data, retail sales, and inflation, just to name a few.
Using the economic calendar for trading
Since traders have to be up to date regarding any news related to the economy, the best way to stay on top of this is by using an economic calendar. Authoritative and trustworthy websites such as Bloomberg as well as certain blog sites can provide economic calendars at the beginning of each week. The financial press is also a reliable source of using an economic calendar. Additionally, some modern forex brokers also offer their users a free calendar, usually in the form of a widget.
How it Technical Analysis Applied on the Forex Market?
Technical analysis involves the study of market action mainly by using charts with the main aim of forecasting future price trends. The main goal of analysts who use this method is pattern determination that will help them forecast future market activity. They are not concerned with measuring the asset’s underlying value. Their belief is firm that historical performance is the strongest indicator of future market performance. Forex traders can use various technical analysis tools such as volume, market trend, range, support, and resistance, and others to develop profitable strategies. They can also conduct a multiple time frame analysis using charts of different time frames.
Trading with the help of technical analysis
Volume Trading Strategy
Volume is one of the most important factors in foreign exchange trading and is thus always analyzed and estimated by those who use charts. It shows the number of securities that are traded over a particular time period, with the higher volume being indicative of a higher degree of pressure or intensity.
Start by looking at the trading volume bars which are usually present at the bottom of any chart. This can assist you in determining the upward or downward movement of volume. A price movement accompanied by a relatively high volume is more significant than one accompanied by weak volume.
Volume can also be used in conjunction with trends. If prices trend higher, it’s indicative of the buying pressure being more than selling pressure. On the other hand, if volume starts decreasing during an uptrend, it can indicate that the upward trend will end soon.
Range Trading Strategy
Range trading is also known as channel trading is usually associated with the lack of market direction and is thus used when there is no trend. The first task of this strategy is to find the range, which can be done by connecting a series of highs and lows using a horizontal trendline. As a trade, you should buy at the support level and sell at the resistance as long as the security doesn’t break out of the channel. You may incur heavy losses if the breakout direction is not favorable to your position.
Trend Trading Strategy
Almost all those who use technical analysis tools have a single purpose: the identification of market trends. In the context of the forex, the market does not move in a straight line, instead of moving in a series of zigzags that are similar to successive ways with clear peaks and troughs (highs and lows).
Contrary to popular belief there are actually three types of trends in the forex market: Uptrend, downtrend, and sideways.
Uptrend, downtrend, and sideways trend
Thus in this situation, investors and traders have an option to choose between three decisions: Going long (buy), Going short(sell), or staying aside. The buying strategy is preferred when the market goes up. Similarly, the selling strategy is right when the market goes down. However, during a sideways trend, the best decision is to stay aside.
Both fundamental and technical analysis focuses on different aspects of the market. For instance, in fundamental analysis, the trader gives importance to political as well as certain macro-economic factors that can directly affect the forex market. On the other hand, technical analysis is concerned with using technical tools and charts to reveal past, present, and future states of currency prices. Depending on the method of analysis used, the trading strategies and methodologies of the trader will differ.