First, in analyzing the market, let us mention that the two forces that drive and move the market are supply and demand. They stand behind every economic, political, scientific, social and market event. All markets in the world depend on them – bulls and bears alike, as well as their open positions.
In this article, dear reader, we will discuss with you the various strategies, methods, and techniques in market analysis and currency analysis methods, which all have one thing in common - they attempt to evaluate supply and demand. Some of them may be quite accurate, for example, the tricks used by technical traders. Others may lack this accuracy, such as economic theories in the fundamental analysis of the Forex market.
Introduction to financial market analysis
Overall, it's all quite emotional. Traders constantly change their sentiment in analyzing the market from bulls to bears, and thus they are the ones who shape supply and demand in this very market they are trying to analyze. They change it over and over again in their new deals, so it's all like a snake biting its own tail.
You should know that good market analysis of supply and demand is the only way to become more successful and accurate than other traders, and in fact, it is the only way to succeed in currency analysis. The market is limited, so you should be able to find ways to buy at a lower price and sell at a higher price compared to nine other traders out there. Otherwise, you simply lose.
Market analysis methods
What is technical analysis and fundamental analysis? Simply put, market analysis relies on two types of market analysis methods: technical analysis and fundamental analysis. They form the basis for any analysis of the global financial market, which helps traders obtain a deeper and better vision of the market, supply and demand, and enables them to predict and benefit from its ongoing trends and movements to their advantage.
Technical analysis relies mainly on price movements on charts and the formation of common analysis models for Japanese candlesticks, trends, support levels, resistance levels for peaks and troughs, various moving averages, and other types of technical indicators and technical tools available on the my website trading platforms to help you analyze... The currency market and reading it to form the appropriate technical analysis.
While the second type of currency market analysis methods relies on fundamental analysis; On global economic, political, and social news, as well as various market and economic data, such as interest rates, gross domestic product, retail reports, jobs and unemployment reports, inflation levels, and more. Fundamental analysis is based on short-term assumptions that prices will move and vary with these economic indicators and news, but will eventually return to the “correct” price. The trading opportunity is exactly the period during which these movements occur, up and down, or vice versa.
In general, fundamental analysis of the foreign exchange market is not a tool that provides you with accurate entry and exit points for trades. Therefore, professional traders rely on combining these two types of market analysis methods in order to obtain the best vision of supply and demand and the picture of the market in front of them.
Technical Analysis
Technical analysis of the currency market is largely defined by being related to charts. Any time you look at the chart, you are actually performing an immediate technical analysis of the chart in front of you, whether it is an analysis of the stock market, currencies, or anything else.
The logic behind chart analysis comes from the Dow Theory formulated by the famous Charles Dow. Which talks about supply and demand. Watch the video below to learn about the main points of this famous theory.
In other words, his concept was that any impact on supply and demand would affect prices and appear on real-time charts. Moreover, classical technical analysis is against taking into account anything beyond the price chart, believing that this data is not important and relevant.
All of the above focuses on technical analysis of the currency market - it only looks at what has already been recorded by the market. This is what makes it a challenge for the trader as follows: How can a trader succeed if all he knows is just general and prior knowledge about market movements and analysis?
Fundamental analysis
The price chart is of little importance in basic currency analysis of the Forex market. Instead, it uses economic data, including interest rates, inflation rates, or trade balance ratios. Fundamental analysis is based on the assumptions that in the short term, financial market prices may not be completely accurate, but in the end they will return to the “correct” price. The trading opportunity is exactly that period of price corrections.
In general, fundamental analysis of the foreign exchange market is not a tool that provides you with accurate entry and exit points for trades. However, informed traders are able to predict market movements with it in the long term.
The hook with economic fundamentals is that although countries behave very much like corporations, currencies do not behave quite like stocks.
For companies, their financial health depends directly on their stock prices. Although there is a difference between this importance for countries. A country's growing economy does not inevitably lead to an increase in the relative value of its currency. This happens because this relative value depends on many factors – not only economic indicators, but also political, national monetary, global technological improvements, international events, and even natural disasters.
Price Action
Price action is a subculture of technical analysis in the currency market. It has been popular ever since Forex trading became known to the masses. In general, price action agrees with the main statements of Dow Theory, but it also believes that technical tools for traders, such as classic technical indicators, cannot give the trader any advantages and preferences over other traders in the currency market who also analyze currencies in their own way. This idea is why price action analysis is so popular.
One of the main technical indicators that price action traders base their trading decisions on is the asset price and its movements. These traders rely only on “bare” charts to receive their data and consider the rest of the indicators only supportive.
Price action trading is based on the perception that the market often returns to price levels from which it reversed or consolidated due to supply or demand remaining at those levels.
Let's look deeper into the idea of "residual supply and demand." Why is he here? Let's imagine how the "hammers" in trading - these institutional traders from banks, multinational companies and investment hedge funds do not chase the market, but simply fill their orders at the desired price. Their forex analysis today looks at the likely market movements for the next month or year, and even if they see that the market level changes from today's level, they never cancel their orders. Therefore, these orders and orders remain open, waiting for the market to return to its required levels. It is those open orders and trades that distort the fabric of the market and bring prices back.
Intraday currency analysis is where price action strategies are most often applied. But we'll get to that.
Supply and demand in currency analysis - Charting
Now let's discuss what a chart is!
Simply put, the chart is a graphical representation of the sequence of prices affected by supply and demand using Japanese candlesticks most often and most commonly. The chart records market history, which is perhaps the most accurate and calculated history in the world.
The axes represent price (0Y) and time (0X); The field displays the price movement itself. Whatever strategy a trader applies - whether it is a long-term or short-term trade - it always starts with the chart.
The West has been using charts for quite some time. They were introduced on Wall Street a hundred years ago, while the Far East knew how to place prices on charts in the form of Japanese candlesticks even 300 years ago.
Japanese candlesticks are actually the embodiment of price, making them a prime technical tool for technical traders. Predicting price movements using Japanese candlestick patterns is a strategy in itself. In order to apply them, traders need to recognize the most common patterns and understand the basic forces that shape them - supply and demand.
In fact, any trading strategy will perform better if it is logically linked to the concepts of supply and demand.
While bare candlesticks may be sufficient, there are more chart patterns that can be applied by investors. The most commonly used ones are trend channels, support and resistance lines, triangles, flags, and many others. However, be aware that they simply support the creation of price models and cannot predict future market movements. Their application is only for your convenience and to better know the past financial market movements.
And a disclaimer: you have a beautiful mind! The human brain is the most advanced and complex thing in the universe. However, it is very suggestive. We are keen to find visual patterns even when there are none. This happens because our brain seeks to make a strange reality more understandable. It may suggest to you that it is a field of flowers in the sky, rather than a cluster of stars. It's Mickey Mouse, not a cloud, or even a human face visible on the moon, as there is nothing there. You must have understood the intent of this point.
In fact, different traders see different patterns on the same chart. Moreover, even the same trader may see the same chart differently at different moments in time. Given this, supporting indicators should only be used for support, not to influence your trading decisions. Supply and demand should be the basic data.
Types of technical indicators in market analysis
If you have a trading platform and opened it, you must have seen a technical indicator. Let's divide the types of technical indicators into two large groups for simplicity.
The first group is called: Trend Followers - they are:
- Moving Avira ges
- MA CD
- A.D _
- Ichimoku _
It indicates the strength and direction of the trend. Note that this is not necessarily an indication of the direction of price movement.
The second group is called: Oscillators. They show transformations and include:
- Relative Strength Index (RSI)
- Stochastic indicator
- Parabolic SAR.
In theory, trend indicators perform tremendously in trending markets, while oscillator indicators are best used in sideways or sideways markets with a limited price range.
There are other indicators in between, such as Bollinger Bands. This indicator is able to track the trend with a divergence of the moving averages (MA), as well as predict shifts in the price range channels.
Volume-based indicators are also available for investors. Trading volume has long been a determinant of supply and demand in financial trading and market analysis. However, it cannot be measured exactly in the spot forex market because it is an over-the-counter market.
To summarize, technical indicators are not perfect. It lags the price and is repainted after the candle closes. Using them separately, usually fails, so traders often combine them to complement each other. Experienced traders may suggest that you keep your chart clean - this means not abusing and overusing technical tools on the chart. In general, trading strategies based on technical analysis alone do not give traders a competitive advantage, but rather give them a general idea of previous financial market movements and based on them, predict future movements.
Economic theories in currency analysis
The difference between the current price of a currency and its "real" value is also settled by several economic theories in addition to the market tendencies we discussed above. These theories include:
- Purchasing power equality : This theory states that the price of goods remains the same after adjusting and changing the price/value of the currency in question. If the price changes and does not stay the same, this provides a spread trading opportunity.
- Interest rate equality: This theory is similar to the previous theory, but instead of goods, the theory says that financial assets should have the same cost in different countries after adjusting their interest rates.
- Balance of Trade Theory : This relates to the country's trade budget. It is assumed that if the volume of import of goods and services is higher than their export, it will lead to a decrease in the value of the national currency.
- Real Interest Rate Definition Model : This theory replicates the IRP and states that currencies with higher interest rates will appreciate against currencies with lower interest rates because they are more attractive to investors.
- Asset Market Model : This is similar to the trade balance and is about the inflow of foreign funds and the outflow of national funds.
In addition to these theories above, weekly Forex analysis is also influenced by raw national economic data. Indicators such as interest rates, GDP, retail sales, employment data, inflation, trade balance, durable goods and others can affect the market in the short term after their announcement.
This approach is the most effective way to measure supply and demand as well as price action. However, it also has its limitations.
The intuition and sentiment-based approach measures open interest, or open trades, which directly indicates supply and demand.
The whole idea is copied from the stock market: market sentiment may change if trading volumes increase and open interest decreases.
The spot Forex market is traded over the counter, which makes measuring trading volume and open interest impossible.
Another useful tool for traders to sense market sentiment is the Forex Futures Commitment Report. It has two drawbacks. First is that the daily trading volume of Forex futures is $100 billion compared to the spot Forex exchange's $1.5 trillion. Second, “whales” in the market include both speculators and counter traders. Scalpers buy more with an uptrend, while counter traders sell more with that trend.
Market Analysis - Conclusion
Given the large number of study factors, how to analyze the financial market gives you the opportunity for a lot of thought. But first, choose the strategies that suit you best - it may be technical analysis alone, or fundamental analysis, but it is better for it to be a mixture of the two, one complementary to the other.
It is recommended that the trader consider fundamental analysis indicators such as: interest, inflation rates, trade balance, market sentiment and other technical tools in order to understand the bigger picture of the global financial market and the supply and demand that drives it. In the short term, currencies do not move straight and direct, which provides a lot of short-term price movements that can be benefited from as well. Here lies the importance of the role of technical analysis.
Whatever analysis you choose to apply, try to trace its logic based on theories of market supply and demand. If it makes sense then act on it. If not, keep thinking about it to find better indicators and insight.
