Understanding Forex Market Analysis

Forex market analysis serves as the primary method used by just about any professional or retail trader for forecasting currency pair exchange rate moves in the huge forex or foreign exchange market. 

If you already participate in forex trading, then your forex broker probably provides various market analysis tools either connected to or independent from the forex trading platform they support that you can use to enhance your forex market analysis abilities. 

Read on for more information about forex market analysis and how you can use it to boost your currency trading profits. 

Benzinga Partner

Get Started

Earn Cashback on Your FX Trades

Open an account in 5 minutes, low commission, spreads as low as 0.0, trade and manage positions from a full suite of mobile and tablet apps.

Get Started

Disclosure: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% to 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

Show More

What is Forex Market Analysis?

Forex market analysis is the process of evaluating the economic, political and social factors that may impact the value of currencies traded in the foreign exchange market. Forex market analysis is a critical part of developing a successful trading strategy as it helps traders understand the market conditions and make informed decisions.

The two main types of forex market analysis are fundamental and technical analysis. Fundamental analysis can help traders understand the underlying factors that drive currency prices, while technical analysis can help traders identify potential trading opportunities and manage risk. Many traders use a combination of both analysis methods to make trading decisions. 

Forex market analysis is an ongoing process that requires traders to stay up to date on economic news, political events and market trends. By incorporating forex market analysis into their trading strategy, traders can make more informed decisions and increase their chances of success in the forex market.

4 Types of Forex Market Analysis

Several forms of forex market analysis exist. You can select from them depending on what suits you best, and you can even combine them to create your own unique market analysis method to include in your trading strategy. The most popular types of forex market analysis include the following four methods: 

1. Fundamental Analysis

Forex traders using fundamental analysis attempt to determine what a currency pair’s exchange rate should be in the forex market by looking at what they deem to be relevant factors for each currency in the pair. Fundamental analysis has the advantage of helping a trader explain why they expect a currency pair’s market exchange rate to move in a particular direction. 

The general objective of performing forex fundamental analysis is to determine whether the currency is overvalued or undervalued by the forex market. Fundamental analysts aim to forecast future exchange rates so that positions can be entered to profit from their market views if they turn out to be correct. 

To forecast an exchange rate for a currency pair, forex fundamental analysts can take into account a wide range of information about the two nations that issue the two currencies. For example, performing a forex fundamental analysis for each county might include assessing the overall state of the nation’s economy and its general geopolitical environment as well as reviewing specific factors like benchmark interest rates, trade balances, gross domestic products, inflation rates, employment data and market prices for the major goods each county imports and exports.

Many forex traders use fundamental analysis to forecast longer-term market moves for a currency pair.  Fundamental analysis can also be used to provide short-term trading opportunities by comparing the market’s consensus expectation for a particular economic data release or event to the actual result and then quickly positioning to take advantage of the sharp market move that can result as the new information is discounted.

Note that a significant disadvantage of fundamental analysis is that it can take a lot of time to perform a detailed forecast for a currency pair. This issue can result in a currency pair’s exchange rate moving to make a possible trade seem less attractive before you get your fundamental analysis done. 

Another drawback to using fundamental analysis is that forex traders can experience “analysis paralysis” because of the complexity arising from the vast amount of fundamental information that can potentially be reviewed. This phenomenon can inhibit a trader’s ability to make quick and accurate trading decisions. 

2. Technical Analysis

Technical analysis involves studying past exchange rate movements with the goal of forecasting future market moves. Depending on their analysis preferences, they might use candlestick charts, bar charts, point and figure charts, line charts and tick charts.

Technical analysts often also peruse exchange rate charts to find chart patterns that have predictive potential, determine the prevailing trend’s direction, assess current market conditions and identify regions of support and resistance that correspond to areas of market demand and supply. 

Technical analysts also often compute indicators from market observables like exchange rates, volume and open interest that can be used to generate trading signals. If they subscribe to Elliott Wave Theory, they might also count waves and compute Fibonacci retracement levels. 

For example, technical analysts might look for trends or ranges appearing on a currency pair’s exchange rate chart. A trend reflects a currency pair’s overall direction, while a range shows areas of support or resistance. 

Traditionally, forex technical analysts would analyze the currency market themselves and use their resulting forecast as a guide to establishing trading positions manually. These days, many computer-savvy technical analysts have incorporated their market analysis methods and trading signals into automated trading software that can execute trades without human intervention. This automation process typically helps speed up their analysis, improve their trading discipline and remove the emotional component from their trading activities. 

Technical analysis has several major advantages. First, it can provide objective and clear trading signals that traders can act on manually or use an automated system to execute trades. Technical analysis is also usually considered superior to fundamental analysis for forecasting short-term market moves and timing trade entry points, even when looking to establish a long-term position based on a fundamental market view. 

Keep in mind that a fundamental assumption of technical analysis is that all available information regarding a currency pair is already discounted in the exchange rate. This means the predictive power of technical analysis can suddenly break down in situations where the market is quickly assimilating new information, such as during an unexpected economic data release or news event. 

As a result, many technical currency traders check forex trading calendars carefully and will prudently square their positions ahead of such market-moving events. 

3. Sentimental Analysis

Sentiment refers to how forex market participants view a currency pair’s future prospects. If their general outlook is favorable for the pair, they tend to establish long positions. If their outlook is unfavorable, they tend to go short. 

Market sentiment indicators typically provide useful information about how various currency market participants are positioned. They also offer an especially useful way for forex traders to discover extreme positioning situations that can help them predict future market reversals. Many traders use sentiment analysis along with the two aforementioned market analysis types. 

Sentiment indicators forex traders can use include the Commitment of Traders (COT) report put out weekly by the Commodity Futures Trading Commission (CFTC) that summarizes the size of positions held by futures market participants. Another sentiment source forex traders can use is the position summaries published by some large online forex brokers. Traders can also use social media sources and market analysis reports to help them assess market sentiment. 

4. Intermarket Analysis

Forex intermarket analysis is a method of analyzing the relationships between different financial markets and using the analysis to predict price movements in the forex market. It involves studying the relationships between the forex market and other markets, such as the stock market, bond market and commodity markets.

The intermarket analysis approach assumes that different markets are interconnected and that price movements in one market may influence price movements in another market. For example, a rise in oil prices may impact the stock market by increasing production costs for companies, which can lead to lower profits and stock prices. This can then affect the value of the currency in countries that are heavily dependent on oil exports.

Forex traders who use intermarket analysis look for correlations and divergences between different markets and use this information to make trading decisions. For example, if there is a strong correlation between the stock market and the forex market, a trader may look at the stock market to gain insight into potential forex price movements. Similarly, if there is a divergence between the bond market and the forex market, a trader may use this information to anticipate potential changes in forex prices.

Forex intermarket analysis can be a useful tool for traders looking to gain a deeper understanding of the factors that influence forex prices. By studying the relationships between different markets, traders can make more informed and profitable trading decisions.

Choosing the Right Analysis Type for Your Trading Style

Choosing the right market analysis type for your preferred forex trading style and personality is crucial to your success as a forex trader. Different types of market analysis provide different insights into the market, and selecting the right one can help you make more informed trading decisions that better align with your trading style. 

If you prefer a long-term trading style and want to base your trades on the macroeconomic factors that affect the market, then fundamental analysis may be the right choice for you. This type of analysis involves looking at economic data, such as gross domestic product (GDP), inflation and employment rates, to make trading decisions.

If you prefer a shorter-term trading style and want to base your trades on exchange rate patterns, indicators and trends, technical analysis may be a better choice for you. This type of analysis involves using charts and indicators to identify trends and support and resistance levels. It can also provide objective trading signals that help remove emotions from your trading decisions.  

Those who prefer to base their trades on market sentiment will want to include sentiment analysis in their strategy. This type of analysis involves looking at the news, social media, COT reports, broker positioning data and other sources to gauge the forex market’s mood and predict exchange rate movements.

If you want to base your trades on the relationships between different markets, then intermarket analysis could be the better choice for you. This type of analysis involves looking at the correlations and divergences between different markets, such as stocks, bonds and commodities, to make trading decisions.

Keep in mind that no one-size-fits-all approach to forex trading exists, so the right market analysis type for you will depend on your individual trading style and preferences. You may want to experiment with using and combining different analysis types to find the mix that works best for you and helps you make more informed and accurate trading decisions.

Featured Offerings

Putting Forex Market Analysis Into Your Trading Strategy

To include forex market analysis in a trading strategy, you need to consider several factors that may impact exchange rates. Here are some steps you can follow:

• Fundamental analysis: Start by analyzing the economic factors that may impact the currency pair you are trading. Also, stay up to date on economic news and announcements to identify potential market-moving events.
• Technical analysis: Identify trends, chart patterns and nearby levels of support and resistance on exchange rate charts. You can also use technical indicators to help you identify potential trading opportunities and generate trading signals.
• Sentiment analysis: Watch the COT reports, look at broker positioning data, and keep track of news articles, social media and market analysis reports on your chosen currency pair to better understand the market mood and identify potential trading opportunities.
• Risk management: Develop a trading plan that incorporates your forex market analysis and risk-management strategy. First size your positions appropriately, then use stop-loss orders to protect your trades from adverse market movements and take-profit orders to lock in your profits.
• Testing: Test your trading strategy by backtesting it on historical price data to identify potential weaknesses and trading it in a demo account. Then refine your strategy as needed before you start trading with real money.
• Review and adjust: Review your trading strategy regularly and adjust it as necessary based on its performance and current market conditions.

By incorporating these steps into your trading strategy, you can use forex market analysis to make more informed trading decisions and improve your overall trading performance. You can also consider automating your market analysis and trading strategy. 

Frequently Asked Questions