There are 4 step-outline to apply Forex market analysis. It is important to know and think critically about the tenets of Forex market analysis.
Here are 4 step-outline to apply Forex market analysis.
1. Understand the Drivers
The art of effective trading is partly due to an appreciation of the current market-to-market relationships and the reasons for these ties. Gaining a sense of causation is crucial, recognizing that these relationships can and do change over time.
For example, investors who expect an economic recovery may explain a stock-market recovery. Such investors expect businesses will have better profits and therefore higher potential valuations — and so it’s a good time to buy.
Speculation, however, based on a flood of liquidity, could be driving momentum and good old greed is pushing higher rates before larger players are on board so the sales can begin.
2. Chart the Indexes
For a longer time frame, it is useful for a trader to chart the significant indexes for each market. This exercise will help a trader assess market-to-market relationships and whether a change is reverse in one market or in conjunction with another.
For example, in 2009, gold was being pushed to record highs.
Was this change a reaction to the perception that paper money is rising a value so rapidly that there was a need to return to the hard metal or was this the result of cheap dollars driving a commodities boom? The answer is that the market moves guided by speculation may have been both, or as we discussed above.
3. Look for a Consensus in Other Markets
For instance, if the currency pair USD / JPY suggests an over-sold position and the Bank of Japan (BOJ) might intervene to weaken the yen, Japanese exports could be affected. A Japanese recovery, however, is likely to get affected without any yen weakening.
4. Time the Trades
A good trade is much more likely if one can find turning points on the longer time frames. Then, it moves down to a shorter timeline to fine-tune an entry. The first trade could be at the same Fibonacci level or double bottom as seen on the longer-term chart, and if this fails then a second chance would always occur on a support level pullback or check.
Patience, discipline, and readiness will set you apart from traders. Those are literally trade on the fly without any multiple Forex indicators being prepared or analyzed.