Did you know that the Forex market (also called the currency market) is a destination for non-concentrated foreign exchange trading and exchange, which is continuously operating globally? Therefore, participants in this field need to have knowledge and know how to do the Forex market analysis. Otherwise, you won't be able to protect your capital.

The following article will give you an overview of the three main methods in the Forex market analysis. What are the differences and what method should we apply to deliver the highest efficiency? Let's go find the answer.

 

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The Importance of The Forex Market Analysis

As you know, the market fluctuates according to two factors: supply and demand - which determine not only financial market volatility but also the overall economy. Forex market analysis is how you predict the direction of transactions in the face of ongoing fluctuations. That's why it plays an essential role in the upward and downward trend, accompanied by open positions to be able to hold commands.

Forex market analysis is a must to understand where you are investing, why did you choose this pair of money, and why did you decide it was the point of entry? You need to answer these questions before you decide to invest in this market. Not only do you need this mindset every time you complete the Forex market analysis, but this is the basic principle of any portfolio you choose to invest in.

Forex Market Analysis Methods

There are many Forex market analysis methods, including the following three most common methods. 

1. Technical Analysis

Technical analysis is the popular Forex market analysis method in which traders use tools and technical indicators to study price movements. In other words, it is the study of past price fluctuations from which current price trends are determined to predict future price movements. 

Basic technical analysis tool:

• Types of theories: Dow theory, Elliott wave theory, EMH theory, etc.

• Chart: Japanese candles, line chart, point and number charts, etc.

• Indicators: RSI indicators, MA, MACD, MFI, etc.

• Price models include: triangular model, 2 bottoms, 2 vertices, etc.

Technical indication:

Trend indicators

Moving average line (MA), MACD (Moving average convergence movement), ADX (Medium Orientation Index) or Ichimoku - indicates the direction of the trend (but not always the direction of the current price action) and the strength of the trend.

Vibration indicator

RSI, Stochastic indicator or Parabolic SAR indicator. By doing so you can assess market trends more accurately.

Trendline 

The trend line is probably the most common form of technical analysis in Forex transactions. It is a line drawn on the tops of the axes or under the bottoms of the axes to show the direction of the popularity of the rack. Through the trend line, you will analyze the Forex market more easily. 

It is also seen as a visual representation of supporting and resisting any time frame. They show the direction and speed of the price and describe the patterns during the contraction of the price. 

You can now create TrendLine automatically through Auto TrendLine. When a new candle appears, Auto TrendLine determines the points to draw the trend line and if the coordinates of the points are changed, the indicator automatically redraws these lines.

2. Fundamental Analysis

A basic analysis is an analysis by observing the Forex market through economic, social events, GDP indicators, interest rates, inflation rates, politics, etc. These factors can affect the supply and demand of an asset. Use supply-demand as an indicator that you might consider the direction of use for price analysis.

Many investors use only basic analysis but may be particularly useful when using it in conjunction with other tools to determine prices for investment purposes. For example, suppose that the U.S. dollar is strengthening because the U.S. economy is growing. As the economy gets better, a rate hike may be necessary to control growth and inflation. Higher interest rates make financial assets in dollars more attractive. As a result, the value of the dollar is likely to increase.

That's how you predict the price of an asset through the fundamentals. If you are a beginner and are learning to analyze the Forex market, you can refer to this method. Basic analysis is not only a simple method but also a way to give you an overview of the product that you are planning to invest in.

3. Psychological Analysis 

Forex market analysis is not always relevant to numbers, but sometimes it is the perception of participants. Psychological analysis is often used to assess sentiment from traders for a particular currency.

Forex markets do not simply reflect all economic information as all traders respond one way. Each trader has a method, and mentality, which constitutes a unique market.

However, to analyze the Forex market by this method, you need to have sufficient sanity not to be distracted by other people's predictions. If you can't control your emotions, it's easy to lead to Fomo.

Which Method Works Best?

Through these three methods, we can see that the Forex market analysis needs to synthesize a lot of factors. And each method has an integral part in conquering this area. 

Technical analysis focuses on charts and price models while basic analysis focuses on economics and politics. Economic data on prices creates trends. Price trends affect central banks to revise monetary policies that produce new economic data. It is important for the trader himself/herself to use and combine to best suit the individual.

The underlying factors form emotions, while engineering analysis helps us to visualize that mentality and apply a framework to create trading plans. If one of the three methods of Forex market analysis is missing, the price line will not be configured. 

Applying Forex Market Analysis

1. Understand the Drivers

The skill of successful trading is partially due to an awareness of present market relationships and the causes for these ties. It is critical to establish causation while keeping in mind that these interactions can and do change over time.

For example, a stock market recovery could be explained by investors who are anticipating an economic recovery. These investors believe that companies will have improved earnings and, therefore, greater valuations in the future—and so it is a good time to buy. However, speculation, based on a flood of liquidity, could be fueling momentum and good old greed is pushing prices higher until larger players are on board so that the selling can begin.

2. Chart the Indexes

A trader can benefit from charting the major indexes for each market over a longer time frame. This exercise can assist a trader in determining market linkages and whether a movement in one market is inverse or in conjunction with another.

In 2009, For example, gold was being driven to record highs. Was this move in response to the perception that paper money was decreasing in value so rapidly that there was a need to return to the hard metal or was this the result of cheap dollars fueling a commodities boom? The answer is that it could have been both, or as we discussed above, market movements driven by speculation.

3. Look For Information From Other Markets

By charting other instruments on the same weekly or monthly basis, we can get a sense of if the markets are approaching a turning point consensus. We can then use the consensus to enter a trade in an instrument that will be affected by the turn.

For example, if the USD/JPY currency pair indicates an oversold position and the Bank of Japan (BOJ) could intervene to weaken the yen, Japanese exports could be affected. However, a Japanese recovery is likely to be impaired without any weakening of the yen.

4. Choose A Good Timeframe

There is a much higher chance of a successful trade if one can find turning points on the longer timeframes, then switch down to a shorter time period to fine-tune an entry. The first trade can be at the exact Fibonacci level or double bottom as indicated on the longer-term chart, and if this fails then a second opportunity will often occur on a pullback or test of the support level.

Conclusion 

In the end, which Forex market analysis is suitable for you? Whatever method you choose, our ultimate goal is to understand how the market works. Hopefully, through the above 3 methods, you have a holistic view and know how to analyze to best suit your plan.