Forex is known to be volatile, but in reality, it’s not that simple. The market is not always random, even if it sometimes seems that way. Instead, it has rules and even laws. You just need to know how to read the situation and understand what it means.
Forex has been around since 1981, but for a long time market analysis was neglected. There are reasons to believe that the major banks and other market participants had internal analytics divisions, but their findings were not made public. Even after private Forex trading was allowed in the 1990s, market analysis remained neglected.
Things are different nowadays. Due to online cooperation between traders, there is now not one, but two competing schools of market analysis. Both have unique strengths and weaknesses.
Fundamental analysis is based on a simple idea — Forex reflects reality. Or, to be more precise, the world economy.
Each major news release affects the market. For example, if the US publish a weak GDP report, the US Dollar may become weakened against the other currency pairs. Similarly, if the United Kingdom fails to achieve a Brexit agreement, the GBP/USD currency pair could start to tank. Positive news also affects the market — for example, if the price of oil begins to rise, the CAD could be soon to follow.
Obviously, no one can follow all the news that happens in the world. That’s why traders that follow fundamental analysis use economic calendars — dedicated lists of economic releases, news reports and other events that may affect the price of different assets, grouped by currency pairs that they affect. Forex broker JustForex has many relevant information in analytics section.
Overall, fundamental analysis is not particularly precise. Unless you have inside information, you can never know how exactly a report may affect the market. You need to follow the situation in both countries very closely, and even then you might get it wrong.
Technical analysis forecasts the market by completely ignoring the outside influence and focusing only on its inner workings. The idea was first introduced in 2005 by James16 on ForexFactory. He noticed, that some price movements cause other market developments — sometimes imminent, sometimes removed.
The actual mechanics behind those patterns are not always clear. Sometimes, they are a result of trader psychology, other times — market manipulation caused by the national banks. There are also patterns that just work — without any specific reason.
The most common patterns are:
- Inside Bar
- Outside Bar
To learn more, check out this guide for basic patterns. There are hundreds of other patterns too, but you’ll be lucky to see them once per day — while these four appear pretty regularly on any 4H chart. There are entire trading strategies built around these four patterns.
Overall, technical analysis is not much better than fundamental, but it allows to track price changes that are not caused by the out-of-market events.
There are two major ways of forecasting situations on Forex. Both have their unique characteristics and, ideally, should be used together. Using only one form of market analysis will not be nearly as precise and will cause loss on the market. Take some practice