The foreign exchange market is dynamic and volatile, so the methods used to predict it must be too. Traders use several different techniques to get an edge on their market or reach specific goals, but no single approach is infallible. The two most popular types of analysis are fundamental and technical.
Fundamental analysis helps traders understand supply and demand driving factors that can affect basic trading logic, including interest rates, trade agreements, political affiliations, etc. Fundamental analysis studies global economies to determine larger forces that may drive currency prices.
Technical analysis focuses less on why the market has moved one way or another for some time (or how far it should go) than who might be buying or selling at a specific price. This type of analysis is about understanding who controls supply and demand at a given time, which can be done by looking at things like volume and open interest (the number of outstanding options contracts) and examining short-term trends that could affect the immediate future.
Technical analysis believes in market equilibrium: assets will always find their way back to an equilibrium point where they trade at their intrinsic value. While this makes sense intuitively, we constantly experience deviations from market equilibrium, which gives rise to all the various strategies traders use – including fundamental analysis.
There are many methods available to traders in the Forex market. Each of these is used for a specific purpose, generally to help analyze where prices are likely to go in the future. Traders who have already mastered trading basics will start experimenting with different technical analysis systems using indicators and automatically generated signals before deciding which is best suited for their trading method.
One method that has become increasingly popular over recent years is Fibonacci Retracement, where price movements are analyzed based on key points along a trend line or other price action identifying indicators. The main point at which this type of system takes its name from is the 23.6% retracement level, which can either be found through manual marking on a chart or may be calculated automatically using a Fibonacci calculator.
Elliott Wave Theory
Another popular method is Elliott Wave Theory, which aims to predict future price movements by looking at the underlying order behind price movements. The market movement itself can be five waves or three waves, each lasting anywhere from 1 minute to several hours in length.
The third system uses candlesticks and indicators to highlight critical areas where traders are likely to see changes in supply and demand. It also looks at whether the trend has enough momentum to continue in that direction or whether it has become exhausted and will reverse soon.
Other methods that use volatility and volume include:
- Range-Bound Trading focuses on finding potential areas of support and resistance within a given timeframe before placing trades accordingly.
- Delta Neutral Trading can help find potential areas of support and resistance based on the stock’s delta value.
By understanding these different analysis methods, traders can better understand where prices could move in the future, helping them make informed trading decisions.
By investing more time into learning about Forex Analysis Methods, traders will stand a much higher chance of success at Forex Trading. Technical and fundamental analyses each have limitations, and there is no guarantee that any specific strategy will work.
Traders often use a combination of methods, taking the strengths from each while minimizing their weaknesses by not putting all their eggs in one basket; it’s what makes traders successful over time. New traders are advised to use reputable online brokers like Saxo Bank and trade on a demo account before investing real money.