An Introduction to Market Analysis and Currency Analysis (Forex).

 An Introduction to Market Analysis and Currency Analysis (Forex).

An Introduction to Market Analysis and Currency Analysis (Forex).
An Introduction to Market Analysis and Currency Analysis (Forex).

Methods of Market Analysis and Currency Analysis (Forex).

 First of all, in market analysis, let us mention that the two forces that drive and move the market are supply and demand. They underlie every economic, political, scientific, social, and market event. All markets in the world depend on them - bulls and bears alike, not to mention their open positions.

 In this article, dear reader, we will discuss the strategies, methods, and various techniques in market analysis and currency analysis, all of which share one thing in common - they try to assess supply and demand. Some may be completely accurate, such as the tricks used by technical traders. Others may lack this accuracy, such as economic theories in fundamental analysis of the forex market.

 In general, all of this is entirely emotional. Traders continuously change their sentiment in market analysis, from bulls to bears, and thus they are the ones who form supply and demand in the market they are trying to analyze. They change it over and over again in their new trades, so all of this is like a snake biting its tail.

 You should know that a 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 must 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 pillars of any analysis of the global financial market, helping traders gain deeper and better insights into the market, supply, and demand, and enabling them to predict and benefit from its continuous movements and trends.

 The technical analysis primarily relies on price movements on charts and the formation of recognized patterns of Japanese candlesticks, trends, support levels, resistance levels for peaks and troughs, various moving averages, and a variety of technical indicators and tools available on Admirals trading platforms to help you analyze and interpret the forex market to form appropriate technical analysis.

On the other hand, the second type of market analysis for currencies, fundamental analysis, relies on global economic, political, and social news, as well as various market and economic data, such as interest rates, gross domestic product, retail sales reports, job and unemployment reports, inflation levels, and more. Fundamental analysis is based on assumptions for the short term, that prices will move and fluctuate with these economic indicators and news, but ultimately, they will return to the "true" price. Trading opportunities occur precisely during these upward and downward movements or vice versa.

In general, fundamental analysis of the forex market is not considered the tool that provides you with precise entry and exit points for trades. Therefore, professional traders rely on combining these two types of market analysis methods to gain a better understanding of supply, demand, and the overall market picture in front of them.

Technical Analysis:

 Technical analysis in the currency market is largely defined by its association with charts. Whenever you take a look at a chart, you are conducting an immediate technical analysis of the chart in front of you, whether it's for stock market analysis, currency analysis, or any other market.

 The logic behind chart analysis comes from the Dow Theory formulated by the famous Charles Dow. It states that any impact on supply and demand will affect prices and be reflected in real-time on the charts. Furthermore, classical technical analysis opposes considering anything beyond the price chart, believing that such data is irrelevant.

 All of the above focuses on technical analysis of the currency market, as it only looks at what has already been recorded by the market. This poses a challenge for traders: How can a trader succeed if their knowledge is limited to general and historical information about market movements and analysis?

Fundamental Analysis:

Price charts have little significance in the fundamental analysis of the forex market. Instead, economic data is used, including interest rates, inflation rates, or trade balance ratios. 

 Fundamental analysis relies on assumptions that in the short term, market prices may be inaccurate, but ultimately, they will return to the "true" price. Trading opportunities lie precisely in these corrective phases of price movements.

 In general, fundamental analysis of the forex market is not considered the tool that provides precise entry and exit points for trades. However, informed traders can predict market movements in the long term.

 The hook in economic fundamentals is that while countries often act like companies, currencies do not act exactly like stocks. For companies, their financial health directly depends on the prices of their stocks. However, this importance varies for countries.

  Economic growth in a country does not necessarily lead to an increase in the relative value of its currency. This is because the relative value depends on various factors, not just economic indicators but also political, national monetary, and global technological advancements, international events, and even natural disasters.

Price Action:

 Price action is a subculture of technical analysis in the currency market. It has gained popularity since forex trading became known to the masses. 

 Generally, price action aligns with the core principles of Dow Theory but also believes that technical tools, such as classical technical indicators, cannot give a trader any advantages or preferences over other traders in the forex market who analyze currencies in their way. This concept is what contributes to the popularity of price action analysis.

 One of the key technical indicators that price action traders rely on in their trading decisions is the price itself and its movements. These traders solely rely on "naked" price charts to gather their data and consider other indicators as supporting tools only.

 Price action trading is based on the belief that the market often returns to price levels that have previously acted as support or resistance due to remaining supply or demand at those levels.

 Let's delve deeper into the concept of "remaining supply and demand." Why is it there? Let's assume that the "smart money" in trading—these institutional traders from banks, multinational corporations, and investment hedge funds—don't chase the market but simply fill their orders at desired prices. 

 Their forex analysis today looks at potential market movements for the coming month or year, and even if they see that the market level deviates from today's level, they never cancel their orders. So, these orders and trades remain open, waiting for the market to return to their desired levels. It is these open orders and trades that distort the fabric of the market and cause price reversals.

Supply and Demand in Currency Analysis - Charting:

Now let's discuss what charting is!

 Simply put, charting is a graphical representation of the price sequence influenced by supply and demand using Japanese candlesticks most of the time and is the most familiar. The chart records market history, which may be the most accurate and calculated in the world.

 The price axes (Y-axis) and time (X-axis) represent the chart, and the field displays the price movement itself. Regardless of the trading strategy one applies, whether it is a long-term or short-term trade, the starting point is always the chart.

 Japanese candlesticks are, in fact, an embodiment of price, making them a key technical tool for technical traders. Predicting price movements using various candlestick patterns is a strategy in itself. To be able to apply it, traders need to familiarize themselves with the most common patterns and understand the fundamental forces that shape them - supply and demand.

Any trading strategy will perform better if logically connected to the concepts of supply and demand.

 While naked Japanese candlesticks may suffice, there are more chart patterns that investors can apply. 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 patterns and cannot predict future market movements. Their application lies only in your convenience and to understand the best past market moves.

 And for the disclaimer: You have a beautiful mind! The human brain is the most evolved and complex thing in the universe. Yet, it is highly suggestive. We are inclined to find visual patterns even when there are none. It happens because our brain seeks to make sense of the strange reality. It might suggest to you that it's a field of flowers in the sky, not a constellation of stars. It's Mickey Mouse, not a cloud, or even a human face appearing on the surface of the moon where there is nothing. You must have understood the purpose of this point.

 In reality, different traders see different patterns on the same chart. Moreover, even the same trader might see the same chart differently at different moments in time. Considering that, supplementary indicators should only be used for support, not to influence your trading decisions. Supply and demand should be the fundamental data.

Types of Technical Indicators in Market Analysis:

If you have a trading platform and have opened it, you must have seen a technical indicator. Let's divide the types of technical indicators into two major groups for simplicity. The first group is called Trend Followers, which includes:

  • Moving Averages
  • MACD (Moving Average Convergence Divergence)
  • ADX (Average Directional Index)
  • Ichimoku

 These indicators indicate the strength and direction of the trend. Note that this does not necessarily indicate the direction of price movement.

 The second group is called Oscillators, which show reversals and include:

  • RSI (Relative Strength Index)
  • Stochastic Oscillator
  • Parabolic SAR (Stop and Reverse)

  In theory, trend indicators perform well in trending markets, while oscillators are better used in range-bound or sideways markets with limited price ranges.

 There are other indicators in between, such as Bollinger Bands. This indicator can track the trend with variations in moving averages (MA) and predict reversals in price channels.

  Volume-based indicators are also available to investors. Trading volume has always been a determining factor for supply and demand in financial trading and market analysis. However, it cannot be accurately measured in the spot forex market as it is an over-the-counter market.

  In summary, technical indicators are not perfect. They lag behind the price and are redrawn after candlestick closure. Using them individually often fails, so traders often combine them to complement each other. Experienced traders may suggest keeping your chart clean, which means not misusing or overusing technical tools on the chart. Generally, trading strategies based solely on technical analysis do not give traders a competitive advantage but provide them with a general idea of past market movements to build expectations for future movements.

Economic Theories in Currency Analysis:

The difference between the current price of a currency and its "real" value is also influenced by various economic theories, in addition to the market sentiments discussed above. These theories include:

  • Purchasing Power Parity (PPP): This theory states that the price of goods remains the same after adjusting for changes in the price/value of the currency in question. If the price changes and does not remain the same, it provides an opportunity for trading based on price differentials.
  • Interest Rate Parity (IRP): This theory is similar to the previous one, but instead of goods, it states that financial assets should have the same cost in different countries after adjusting for interest rates.
  • Balance of Trade Theory: This theory relates to a country's trade balance. It assumes that if the volume of imports of goods and services exceeds exports, it will lead to a depreciation of the national currency.
  • Real Interest Rate Definition Model: This theory, known as IRP, suggests 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 balance of trade theory and revolves around the inflow of foreign funds and the outflow of domestic funds. It states that the higher the foreign investment and inward flow of funds into the country, the higher the value of the national currency.

 In addition to these theories, weekly forex analysis is also influenced by raw national economic data. Indicators such as interest rates, gross domestic product (GDP), retail sales, employment data, inflation, trade balance, durable goods, and others can have a short-term impact on the market after their announcement.

The approach based on intuition and biases in analyzing the currency market:

 This approach is considered the most effective method for measuring supply and demand, in addition to price movement. However, it also has its limitations.

 The intuition and biases-based approach measures open interests or open trades, which directly indicate supply and demand.

 The entire idea has been imitated from the stock market: market sentiment may change if trading volumes increase and open interests decrease.

 The spot forex market is traded without a prescription, making it impossible to measure trading volume and open interests.

 Another useful tool for traders to sense market biases is the Commitment of Traders (COT) report for the futures forex market. It has two drawbacks. 

  • Firstly, the daily trading volume for forex futures contracts is $100 billion compared to the spot forex market, which amounts to $1.5 trillion. 
  • Secondly, "whales" in the market include both speculators and traders on counter trades. Speculators buy more with the uptrend, while traders on counter trades sell more in the same direction.

Market Analysis - Conclusion

 Considering the large number of factors to study, how to analyze the financial market gives you an opportunity for much thought. However, initially, choose the strategies that suit you best - it could be technical analysis alone or fundamental analysis, but it's best to have a combination of both complementing each other.

 Traders should consider fundamental analysis indicators such as interest rates, inflation rates, trade balance, market biases, and other technical tools 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 in a straight and direct manner, providing many short-term price movements that can also be capitalized on. And this is where the importance of technical analysis lies.


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