There’s a whole range of reasons why forex currency prices rise and fall. The economy may be in a state of flux, investors may be fleeing, or the government may be in turmoil. There are so many factors to consider when trading forex and planning your next move.
In order to make sense of the markets before, during, and after you complete your forex positions, you need to make use of two types of analysis: fundamental and technical. Once you get used to using these, you can start to make more informed forex trades.
In the forex market, fundamental analysis is key in order to analyze the diverse array of forces at play. Everything from basic economics to politics to social issues, the supply and demand of a currency will be impacted by a range of key fundamentals.
By combing through fundamental analysis, you can develop an understanding of how and why key figures and events such as employment rates, inflation numbers, and debt levels are affecting the nation’s economic and monetary policies. These in turn will have a direct impact on the quotes of related forex pairs.
If the economy is booming, then the currency will strengthen because the country is more likely to attract foreign investors. If the economy is contracting, then the currency will weaken because the country is less likely to attract global investment.
For example, since the end of the Great Recession, the US dollar has appreciated as much as 20%. Because the US economy has been surging for the last 10 years, the greenback has increased in value.
On the other hand, over the last decade, the euro has depreciated as much as 10%. The economies of several European nations have tumbled, the European Central Bank (ECB) has introduced numerous policies the market disapproves of, and political unity has diminished.
Simply put: when times are good, the currency will rise; when things are bleak, the currency will stumble.
Technical analysis, on the other hand, consists of forex traders studying the specific movement of forex currency prices.
Forex traders will analyze patterns of past and current trends to predict price movements – up or down. How do traders do this? By watching the charts.
A chart will visualize data within a second – because that’s how fast the forex market moves. That doesn’t mean two forex traders will come to the same conclusion however. In fact, each trader may come up with totally different trading ideas when examining the same technical chart.
For example, if a specific price level resisted a crucial event in 2014, then that may be a signal to a forex trader that it will hold at its present quote. Or, if a specific price level reacted to an important story in 2016, then one trader may think the next report may not have much effect this time around.
Traders will often make use of a range of technical indicators in order to help them identify and act on trends. However, it’s important to remember that these indicators are just based on historic data and are never about to predict with 100% accuracy what currency pairs are going to do at any particular moment.
Fundamental and technical analysis are key to surviving and thriving in the forex market. By understanding current events and looking past immediate trading conditions, you can enter into forex currency positions with more confidence. Try them both out with an Exness account today.