In the most basic definition, forex analysis examines the currency pair price changes in order to know their current and future direction. Commonly, forex traders’ goal from doing this analysis is to make a profit.
The foreign exchange market handles around $5 trillion in daily trading, making it the largest market in the world.
How does a Forex Market Work?
As we all know the forex market is open five days a week and 24 hours a day. That is because we will always see a major global market (London, New York, Australia, and Tokyo) open somewhere, thus we will always find sellers and buyers for currencies any time five days a week.
As we have so many currencies in this world, currencies are always traded in a pair. Within that pair, one currency is sold, while the other one is purchased.
While, with forex analysis, traders plan to predict the possible profit they can get from the currency pair movement. They will know, within a pair, which currency will be stronger. Then, they will buy that stronger and sell the weaker currency, at the same time.
We have more than 150 currencies, but there are only several of them being traded mostly. Those currencies are the U.S. dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), Swiss franc (CHF), Australian dollar (AUD), New Zealand dollar (NZD), and Canadian dollar (CAD).
The currency pairs that don’t involve those currencies usually have a lower trading volume.
The Types of Forex Analysis
Forex analysis relies so much on how businesses and individuals doing trading. Basically, we have two main types of analysis, they are technical and fundamental analysis.
Other than those, we also have sentiment and statistical analysis that combines both fundamental and technical analysis.
Technical Analysis
This analysis uses the past price movement to predict the value of a currency pair in the future. Thus, in this analysis, traders focus on many different analytical tools and price movement charts.
Within this analysis, normally, traders will find a repeating pattern. They, later, predict the future price with those patterns.
Fundamental Analysis
This analysis, use the current and future factors that may affect the whole country’s economy. Traders usually assess factors like the country’s interest rates, GDP, inflation rate, and other economic indicators.
Among those factors, they point interest rates as the most important factors. Usually, they make a decision based on that.
Sentiment Analysis
It relies on the number of people buying and selling a specific currency and also their opinion about the future direction of that prices. It is the tone or the feeling of the market that people usually refer to as crowd psychology.
