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How to do forex analysis

Forex trading depends on how well the trader analyses the forex market. A very trader that is placed should be based on some kind of analysis even if the trader is scalping. There have to be some logics behind the trading. The trader cannot just place and close trades as he likes without doing any analysis.

There are different methods to analyze the Forex market before trading. Basically, there are three main trading methods that traders use. The trader may choose to use only one or a combination of the analysis methods. The three methods are:

1. Fundamental forex analysis methods

Fundamental forex analysis is a method of studying the forex market by examining economic, social, and political forces that may possibly have an impact the supply and demand of an asset (currency pairs or commodities). The social, economic and political factors within different countries and even economic blocs affects the strengths of the respective currencies, hence affecting the market prices of the currency pairs.

The trader uses these factors to analyze and predict the future market price movements so that he or she can place a trade anticipating to make profits if his or her analysis is correct. The trader has to look into the behavior of the economies of different countries. The trader therefore has to comprehend how and why certain events such as an increase in the unemployment rate affects the economy of a country, and also other factors like monetary policies which affects the level of demand for the currency of a specific currency.

Mainly in fundamental forex analysis, the trader depends on a variety of indicators to show the current and future outlook of the economy of a country so as to know whether its currency will strengthen or weaken.

2. Forex Technical Analysis Methods

Forex technical analysis is based on the study of the historical price movements of the forex markets in order to predict any future market price movements.

In financial markets like forex markets, price movements replicate themselves. This is mainly due to the fact that the market price movements are affected by humans and humans follow certain patterns. In technical analysis the forex traders study and analyze the forex market price movement. It is based on the fact that a trader can effectively look at the historical price movements and use the information to explain the current trading conditions with a picture of the potential price movement in mind. Technical analysts search for similar repetitive patterns that have formed in the past. Then they use these patterns to form trading strategies with a hope that the market prices will act the same way as it behaved before.

3. Sentimental forex analysis methods

Forex technical analysis is based on the study of the historical price movements of the forex markets in order to predict any future market price movements.

Sentimental forex analysis is used widely by forex traders even without them knowing that they are using it. It is mainly based on looking at what the other traders are doing and making decisions depending on how much a currency pair or commodity is traded.

For example, assume that the EURUSD is overbought. A trader may then use this to place a pending sell order since when the market is overbought, it is bound to fall a bit for some time. Also, if the market is oversold, then it is destined to rise.

Nowadays there are indicators that are designed to help traders in sentimental analysis. An example of such indicator is the stochastic oscillator indicator.

In the above picture the levels showing the oversold and overbought conditions can be altered in the indicators settings to suit the traders quest.

stochastic indicator for sentimental forex analysis Figure . showing how to use stochastic indicator for sentimental forex analysis