Forex market analysis methods for beginners
While some new forex traders may be helped by beginner luck and open positions on the right currency pair in the right direction, this luck rarely lasts. To be successful in currency and CFD trading in the long term, a trader has to be able to make informed trading decisions, and these decisions are the result of market analysis.
Analysis is very necessary for trading in the stock market, currencies and other financial trading tools. Charts are useful for both short term and long term trading. You should look at the daily, weekly and monthly charts. Fortunately, there are a number of different ways to analyze the forex trading market, which means that every trader can find the right approach for them. The three broad categories of global money market analysis are fundamental analysis, technical analysis, and wave analysis.
This form of analysis involves following real-world events that may affect the values and of the financial instruments you want to trade. For example, the value of the Australian dollar may fluctuate after the announcement of the Reserve Bank of Australia interest rate, which will therefore affect the movements of all currency pairs including the Australian dollar.
The seven economic indicators that have the greatest impact on the forex trading market are:
Gross Domestic Product (GDP)
Non-farm payrolls report (known as non-farm payrolls, or NFP)
Industrial production index
Durable goods orders
Interest rates for national banks (such as the European Central Bank or the US Federal Reserve)
There are three possible scenarios after an economic publication or announcement:
No reaction, indicating that the market had expected the announcement.
Strong movement according to the economic data announced (if the announcement carries positive news, the instrument affected by this news will increase in value)
Strong move against joint economic data
The biggest challenge is evaluating the most likely outcome, and then opening a trade accordingly. A good starting point for this trading approach is to be aware, first of all, of upcoming events that may affect the forex market (check out our live calendar of economic events) and second, of looking at the impact of similar announcements on different currency pairs in the foregoing. You can learn more about fundamental analysis in our article: Introduction to Fundamental Analysis.
While fundamental analysis focuses on what is happening in the real world of news, including economic, political and business news and events, technical analysis focuses largely on what is happening in the price charts of trading instruments.
Trading data graphs simply record the price movements of different trading instruments over time, allowing traders to identify a financial instrument’s price movement patterns and make trading decisions based on the assumption that these patterns will recur in the future. For example, one form of trading chart is the Japanese candlestick chart, which is formatted to emphasize the high and low price points of certain time periods (these time periods can be set by the trader in his trading platform).
The trader can see the following on the candlestick chart:
opening price for the period
Highest price point for this period
Lowest price point for this period
Closing price for this period
This information can allow traders to form judgments about the pattern of price movements of a chosen currency pair. For example, if a Japanese candle closes near the highest price of the chosen period, this means that there is a strong interest on the part of buyers for that currency pair during that particular time period. The trader may then decide to open a long position to take advantage of this interest.
Over time, common patterns appear in the movement of the charts (and the formation of various candles), which can then be used to predict potential future price movements and make the best trades based on these forecasts.
As soon as a certain pattern appears, this is known as a forex indicator because it indicates that there is potential for a profitable deal. While there are a host of resources available online for learning about the best forex indicators, your trading software should have a set of built-in indicators that you can use for your trading, as is the case with the MetaTrader 5 indicators.