As has been discussed endlessly on this site as well as other forex blogs and forums, a thorough analysis of the markets is a key part of any forex trading strategy.

Getting this part of trading right is perhaps the single most important thing you can do to master your grasp of the currency and CFD markets.

There are plenty of analytical methods you can conduct, and in this article, we’ll explore some of the different analyses you can undertake and what kind of insights you can expect to uncover with each.

Forex Market Analysis

As you begin to navigate the sometimes choppy waters of forex trading, your first port of call should be creating a suitable watchlist that will serve as the starting point of your trading days. 

Although there are dozens of currency pairs you can choose from, most of them will not be suited to your needs as a trader due to a variety of reasons such as your risk profile, levels of volatility, volume, spreads or a combination of all these factors.

On your demo account, be sure to open trades on a wide range of currency pairs when you’re first starting out in order to see which pairs suit your trading style and which definitely do not. 

The essential pairs to add to your watchlist are the major currency pairs such as the EURUSD, GPBUSD, USDJPY and AUDUSD. After that, explore four or five other pairs that you can trade once in a while when they present opportunities. You might want to explore a few crosses such as the EURGBP and GBPJPY, which are more volatile than the majors and present frequent points of entry.

Forex Price Action Analysis

Forex price action refers to a branch within technical analysis that explores methods such as support and resistance levels, chart patterns (such as the “head and shoulder” pattern, for example), and candlestick analysis.

The term “price action” is borne of the fact that this type of analysis relies solely on naked chart analysis, versus other forms of technical analysis which involve technical indicators and complex calculations.

The three main types of price action analysis are:

Support & Resistance

Support and resistance is perhaps the most basic principle of price action that every trader should try to become familiar with soon after they begin their trading journey.

The two factors of support and resistance levels are price and time (time of the chart you’re looking at).

By choosing a chart period and looking at common price ranges where the price seems to “get stuck”, traders can easily determine some key support and resistance levels. You will then draw lines according to where you detect these price ranges.

A horizontal line above the current price is considered a resistance level, while a horizontal line below the current price is considered a support level. Diagonal lines drawn off the tops and bottoms of a general trend can also serve as support and resistance. 

Candlestick Patterns

This type of analysis zooms into the chart to focus on one, two or three candlestick structures. There are numerous permutations of candlestick shapes, sequences and structures that can offer clues into trend formation and reversal of price. 

Get acquainted with candlestick patterns as this methodology will become a key weapon in your technical analysis armoury. 


Chart Patterns

Chart patterns analysis takes a much wider view of the markets than candlestick patterns. Identifiable patterns will come in many different forms, including traditional structures such as head and shoulders and diamonds, to more modern patterns such as so-called “harmonic” patterns, which include structures as the Cypher, Bat, AB=CD and Gartley.

Fundamental Analysis

Forex fundamental analysis explores the major macroeconomic influences within an economy (or economic region such as the EU) that will most impact the exchange rates between different countries.

In this area of analysis, traders will attempt to gain an in-depth understanding of the economic conditions of each territory and how different conditions affect the related currency’s value.

This type of analysis also includes looking at scheduled data releases such as unemployment figures (the US Non-Farms Payroll report), Consumer Price Index reports (which are a useful measure of inflation), and statements from central banks regarding interest rates.

Becoming familiar with these types of data releases is essential to make a decent fist at becoming a sharp fundamental analyst.

Some of these reports, such as the NFP, are released monthly, while others will be released quarterly. For traders with a longer-term outlook on the markets, this is useful because it gives you time in between releases to unpack the fallout from these reports and arrive at longer-term conclusions about future price action.

Although both fundamental and technical analysis should be carried for a complete analysis of every market before you trade, most traders will focus more on one or the other, and this weight of focus is said to describe your style.

Fundamental traders are more suited to trading for the medium to long term, since the timing of your entry will be much less of a critical factor than it will be for technical traders, for whom timing is everything. 

A largely fundamental approach is not suited to short periods such as the 15-minute chart, and is much more suited to time charts in between the hour and day periods.


Conclusion

Carrying out thorough analysis and research is vital to achieving consistent success as a trader. A large portion of your overall success in day trading will depend on how well you can carry out each of the various methods of analyses. You should therefore take as much time as possible to study and practice the various methods of analysis and hone your understanding of each.

Whether ultimately you find yourself most comfortable with a fundamental-heavy approach or a more technical approach, it’s vital that you have a clear idea of what you’re doing and why. Developing a process that you follow before entering trades in the market is important, even though that process will need to be continuously improved and optimised. The existence of a process will provide signals and entry & exit points that will set you on your way to meeting your investment goals in the world of forex and CFDs trading.

Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.

TIO Staff
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