There are three main ways to analyze Forex price action and to predict if a currency pair will rally or drop. The different methods discussed in this article have their pros and cons, but they are all handy in determining which trade setups have higher odds of winning. You can base your choice of analysis on your preference and skills, but you can also try to use all methods together in making trades.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
Fundamental analysis also watches monetary policy of central banks. This has a direct effect on currency value because it has to do with the return on holding a currency and the amount of cash in circulation. With that, it impacts the supply and demand of the currency and therefore its price. Political and environmental factors could also play a role in fundamental analysis because these usually have an indirect impact on economic activity.
The second kind of forex trading analysis is known as technical analysis. This has to do with watching previous price action in predicting future price movements. In particular, technical traders take a look at chart patterns and candlestick formations top redict if price will rise or fall.
In addition, technical indicators used on the forex price charts are also helpful tools in technical analysis. These comprise leading and lagging indicators, such as the RSI or Bollinger Bands. These indicators can be used in tandem to give confirmations for market tops or bottoms. Support and resistance levels, otherwise known as inflection points, are also part of technical analysis.
Lastly, traders also conduct sentiment analysis. In doing this, they watch the behavior of other traders to identify if markets are bullish or bearish for certain currencies. To do this, they also look at the risk levels. This gauges if traders are likely to pursue riskier currencies or safer ones.
When risk is on, traders tend to go for higher-yielding currencies which carry more risk. When risk is off, traders usually buy lower-yielding currencies which carry less risk, such as the dollar or yen. The Commitment of Traders report is a useful tool in identifying if large speculators or retail traders are bullish or bearish on particular currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
Fundamental analysis also watches monetary policy of central banks. This has a direct effect on currency value because it has to do with the return on holding a currency and the amount of cash in circulation. With that, it impacts the supply and demand of the currency and therefore its price. Political and environmental factors could also play a role in fundamental analysis because these usually have an indirect impact on economic activity.
The second kind of forex trading analysis is known as technical analysis. This has to do with watching previous price action in predicting future price movements. In particular, technical traders take a look at chart patterns and candlestick formations top redict if price will rise or fall.
In addition, technical indicators used on the forex price charts are also helpful tools in technical analysis. These comprise leading and lagging indicators, such as the RSI or Bollinger Bands. These indicators can be used in tandem to give confirmations for market tops or bottoms. Support and resistance levels, otherwise known as inflection points, are also part of technical analysis.
Lastly, traders also conduct sentiment analysis. In doing this, they watch the behavior of other traders to identify if markets are bullish or bearish for certain currencies. To do this, they also look at the risk levels. This gauges if traders are likely to pursue riskier currencies or safer ones.
When risk is on, traders tend to go for higher-yielding currencies which carry more risk. When risk is off, traders usually buy lower-yielding currencies which carry less risk, such as the dollar or yen. The Commitment of Traders report is a useful tool in identifying if large speculators or retail traders are bullish or bearish on particular currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
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