Price movements depend on many factors such as economic conditions, political norms, macroeconomic statistics of economic announcements made by influential officials, and many more. Therefore, it is still possible to predict the market. There are mainly two analytical methods in the Forex market: Technical and Fundamental Analysis. We will refer to each of them separately.
Forex technical analysis
This type of analysis is based on the fact that the exchange rate trend is already incorporated in the history of its past fluctuations. The basis of such an assumption is that, first of all, any complex object (the market is a very complex object) is inertial, and, secondly, history tends to repeat itself. An operator, using technical analysis, constructs currency exchange rate charts, finds trend lines in those charts, determines the form of a trend reversal, and calculates several mathematical indicators, based on which he decides to open a Long or short position.
It is certainly important to understand that concrete prediction is impossible because the factors that affect exchange rates are psychological, political, economic, and so on. There is no physical law that affects the market, based on which analytics can make 100% predictions.
The technical analysis is based on the time series of the currency pair sequence, each point of which is a relatively short period of time. In fact, the deadlines are as follows: 1 minute, 5 minutes, 15,30,60,1 days, one week, and one month. These series of numerical prices are analyzed by mathematical methods or visually evaluated by the operators from the graphs.
Types of Graphics
By means of the graphic analysis, it is understood that to predict the market, only graphic images of the market (price graphs, volume graphs) and their graphic models are used. Actually, these are the simplest methods since they require a minimum of software. Therefore, four basic types of graphics can be distinguished:
- Line chart
- Bar graphic
- Japanese candlesticks
- Tick chart
Indicators and technical standards
Speaking of technical analysis, it is very important to mention the tools that operators use most frequently: indicators and technical patterns. There is a fairly wide range of these tools, but let’s look at the most used:
- TREND LINES: Lines that join the highest and lowest high points (upward trend) or the lowest and lowest high points (downward trend). The prices that break these lines can signal the beginning of a possible change in the price direction.
- AVERAGES IN MOTION: Softens past movements and indicates a possible new trend.
- INVESTMENT PATTERNS: maximum and minimum sequences, such as head and shoulders.
- SUPPORT AND RESISTANCE: the price levels at which the future dynamics of prices tend to stop and/or reverse.
- RELATIVE FORCE INDICATORS: they show the overbought or oversold status of the market.
- FIBONACCI LEVELS (FIBONACCI LEVELS): Price levels that indicate the purpose of possible corrective movements of previous movements of important prices.
- MACD o Convergences / moving average divergence: Comparison of the dynamics of the two moving averages to identify early trends and trend reversals.
- CYCLICITY INDICATORS: Prices often oscillate; they pass a phase of growth, decline, maintaining the general long-term trend. Cyclic indicators help to find such cycles.
Fundamental Analysis in Forex
This type of analysis studies macroeconomic events, policy news, and other world events that somehow affect currency exchange rates. The main difference between fundamental analysis and technical analysis is that the Fundamental is based on the principle that currency prices in the Forex market are a reflection of supply and demand, which in turn depend on fundamental factors of the economy. On the contrary, technical analysts do not consider the study of the reasons for price changes important and emphasize only the study of price dynamics and the history of price movements.
The events that affect the market can be distinguished between 2 groups: expected and unexpected. These events include the publication of various economic indicators, which help to predict the next important events. On the contrary, unexpected events cannot be anticipated in any way because all such events include natural disasters, political revolutions, acts of terrorism, etc.
According to the Fundamental analysis, predicting price changes is possible through the prediction of the factors that affect supply and demand. Thus, the difference between the two methods of analysis is as follows: for technical analysts, if prices have changed, then something has changed in supply or demand, and the reason is no longer important because prices have already changed. Instead, fundamental analysts pay close attention to the factors that affect that change.
So, what factors have the most important effect on currency price changes?
- GDP (Gross Domestic Product)
- The volume and dynamics of public spending.
- The volume and dynamics of income to the state budget.
- Budget deficit/surplus.
- Aggregate consumption.
- The private investment added.
- The level of private savings
- The export volume
- The import volume
It is worth mentioning that operators do not wish to devote their time to study the fundamental analysis and do it themselves. Above all, they prefer to follow professional financial analysts. This type of analysis is available because it is published in newspapers, it is present on the web, on television and on the radio. In addition, there are stockbrokers who provide their own analysis on their websites, which makes the negotiation process much easier for traders.
An important part of the market analysis is the analysis of expectations, which deals with the mood and emotions of market participants (traders). In contrast to conventional analysis methods, through learning expectations, we are trying to understand and measure (for example, through surveys) what operators expect for today and for the near future.
During the negotiation, each participant has an opinion, and of course, these opinions of large groups of market participants can have an impact on the market itself, and the negotiation results as well. These opinions form the general mood of the market.
The understanding and appreciation of these feelings are quite effective in understanding the actions of market participants in the present and in the near future. Various expectations indexes (which are part of macroeconomic statistics) are regularly published on the Internet.