What is Forex Analysis
Forex analysis examines the changes in the foreign exchange market (FX). In the forex, traders buy, sell, exchange and speculate on currencies with the goal of making a profit. The foreign exchange market, considered the largest in the world, handles over $5 trillion in daily trading.
Banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers, and traders use forex analysis to determine the best trade for a currency pair at any given time. Some forex analysis is manual, but most of the analysis is through the use of computers with software which analyzes historical data and signals from forex markets.
BREAKING DOWN Forex Analysis
Traders often disagree about which type of analysis gets the best results. For a new trader, just entering into forex trading, the best method will depend on how much time and information they have. The forex market is highly liquid. Prices of currency pairs can change drastically without prior warning. One of the benefits of trading currencies is its massive trading volume, which covers the most significant asset class globally.
There is no one-stop shop for buying and selling currencies. Trading happens through many individual dealers or financial centers through electronic networks. The forex market is open 24 hours a day, five days a week, and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.
Forex analysis software includes charts that are useful in identifying user set perimeters. These may be available from a broker through the use of a trial account. It is critical that new traders experiment with a couple of different brokers and offerings before deciding where to open their account.
(To learn more about forex trading, read Investopedia's Forex Walkthrough.)
Types of Forex Analysis
Just as there is no one-stop exchange for exchanging foreign currencies, there is no one-stop type of forex analysis. Forex analysis is highly dependent on the business or individual doing the trading and may be technical, fundamental or based on sentiment.
- Technical analysis relies on past price movement data to predict currencies’ future value. Traders focus on charts of price movement and various analytical tools to evaluate a security's strength or weakness. In technical analysis, a trader examines the prices of specified currencies over time. In most cases, they will recognize repeated patterns, which they then use to predict the movement of the market. With automated technical analysis, computer software analyzes the history of the currencies’ price movement. Currency values tend to fluctuate in fairly predictable patterns, which gives this style of analysis value. Technical analysis is the most popular type of forex analysis.
- Fundamental analysis relies on current factors affecting countries’ economies. These traders look at related economic, financial, and other qualitative and quantitative factors. In fundamental analysis, traders examine factors such as a country’s inflation rate, interest rates, GDP and other economic indicators. Traders consider interest rates particularly important when making decisions. A higher interest rate will attract more investors, which, over time, will increase the value of that country’s currency.
- Analysis based on sentiment occurs when a large proportion of traders invest in a specific currency. It is the feeling or tone of a market or its crowd psychology. When a trader uses sentiment to analyze the forex market, they look for a particularly large amount of investment in a particular currency. With a large number of investors purchasing a given currency, the number of future sellers of that currency expands. This can create some risk if many of those investors decide to sell that currency at the same time.