Analyzing the Forex Market
You need to understand the forex market before you invest your money. Basically, the wisdom on investing comes with experience and time but there are certain common things that any trader must watch for in a forex market, since it is very volatile. There are two main ways to analyze the market.
Fundamental analysis (1)
Technical analysis (2)
1. Fundamental analysis means analyzing the market on the basis of the economic, political, production and earning factors as well as the psychological environment of the country. The economy of a country decides its GDP and growth rate. All these factors that decide the economy and development of the country directly affect the country's position with respect to other countries. The better the position of the country, the better its currency will be. Fundamental analysts keep a close track of the news relating to economy and politics
Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by purchasing the mispriced security and then waiting for the market to recognize its "mistake" and re-price the security.
2. Technical analysis means analyzing the market on the basis of the charts and graphs. It takes into consideration the previous weeks, months or even year's data. Based on the past data, a trend is discerned and future trend is determined.
Technical analysis maintains that all information is reflected already in the currency price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a currency is. Their price predictions are only extrapolations from historical price patterns.
One of the underlying tenets of technical analysis is that historical price action predicts future price action. Since the forex is a 24-hour market, there tends to be a large amount of data that can be used to gauge future price activity, thereby increasing the statistical significance of the forecast. This makes it the perfect market for traders that use technical tools, such as trends, charts and indicators. It is important to note that, in general, the interpretation of technical analysis remains the same regardless of the asset being monitored.
In our personal trading style, we put more emphasis on technical analysis than fundamental analysis, but we pay careful attention to market movers like economic indicators and take note of the daily calendar in regards to our trade entry and exits.