Forex analysis is used by retail forex day traders to determine buy or sell decisions on currency pairs.
Forex analysis could be technical in nature, using resources such as charting tools. It can also be fundamental in nature, using economic indicators and/or news-based events. The day trader’s currency trading system uses analysis to determine buy or sell decisions when they point in the same direction. Automated forex trading strategies that incorporate technical and fundamental analysis are available for free, for a fee or can be developed by more tech-saavy traders.
Types of Analysis Used in Forex
Fundamental Analysis
Fundamental analysis is often used to analyze changes in the forex market by monitoring factors, such as interest rates, unemployment rates, gross domestic product (GDP) and many other types of economic data that come out of countries. For example, a trader conducting a fundamental analysis of the EUR/USD currency pair would find information on the interest rates in the Eurozone more useful than those in the U.S. Those traders would also want to be on top of any significant news releases coming out of each Eurozone country to gauge the relation to the health of their economies.
Technical Analysis
Technical analysis comes in the form of both manual or automated systems. Forex systems use past price movement to determine where a given currency may be headed. A manual system typically means a trader is analyzing technical indicators and interpreting that data into a buy or sell decision. An automated trading analysis means that the trader is “teaching” the software to look for certain signals and interpret them into executing buy or sell decisions. Where automated analysis could have an advantage over its manual counterpart is that it is intended to take the behavioral economics out of trading decisions.
Automated technical analysis and manual trading strategies are available for purchase through the internet. However, it is important to note that there is no such thing as the “holy grail” of trading systems in terms of success. If the system was a fail-proof money maker, then the seller would not want to share it. This is evidenced in how big financial firms keep their “black box” trading programs under lock and key.
Weekend Analysis
There are three basic reasons for doing a weekend analysis. The first reason is that you want to establish a “big picture” view of a particular market in which you are interested. Since the markets are closed and not in dynamic flux over the weekend, you don’t need to react to situations as they are unfolding.
Secondly, the analysis will help you to set up your trading plans for the coming week. Weekend analysis is akin to an architect preparing a blueprint to construct a building to ensure a smoother execution. Remember, shooting from the hip can leave a hole in your pocket! Finally, a weekend analysis helps build a routine so you can establish the necessary mindset for the upcoming week. (For further reading, see “9 Tricks of the Successful Trader.”)
Forex Analysis: The Bigger Picture
Analysis can seem like an ambiguous concept to a new forex trader. Therefore, it’s important to think critically about the tenets of analysis, which we’ve outlined in four steps below.
1. Understand the Drivers.
The art of successful trading is partly due to…