Forex Analysis

By: EconomyWatch   Date: 23 July 2009

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Forex analysis is the analysis of the various factors that affect the performance of a currency at the foreign exchange market.

 

Forex analysis comprises the following types:

  • Fundamental analysis

  • Technical analysis

                                                   

Fundamental Analysis

Fundamental analysis is the market analysis of many factors that affect the price movements of its trading unit i.e. the country’s currency. These factors could be either economic or political. It is based on various co-related forces such as:

  • political stability

  • GDP

  •  human capital ratio

 Forex traders keep a close eye on the export and import data of a county’s fiscal balance sheet to determine trading strategies. Political and emotional factors such as, the speeches of the chairman of the US Federal Reserve Bank or the World Bank or a political coup in a specific country, affects the stability of its currency on the exchange.

 

Fundamental Analysis: Factors
 

There are four powerful figures that move the forex market:

 

  • Interest: When the government raises the interest rates, traders move assets to the specific currency in order to get constant high returns.  

  • Employment situation: Employment factors such as a rise in unemployment or  a decrease in payroll affects a currency negatively.  

  • Trade balance, budget and treasury budget: A country with trade balance deficit will have continuous selling at the currency exchange which will make it weaker.  

  • Gross domestic product (GDP): The strength of a country’ economic activity is indicated by its GDP. A high GDP has a positive effect on a country’s currency. It also implies higher interest rates.

 

Technical Analysis

Technical analysis is the factual analysis based on the actual price and volume transformations of a currency. Analysts use various models and trading platforms such as:

  • relative strength index

  • moving averages

  • regressions

  • inters and intra market price correlations

  • cycles and charts.

 

Technical analysis is most popularly used by:

  • day traders

  • market makers

  • pit traders.

 

Technical Analysis: Factors  

The most common factors that are followed are:

 

  • Internal factors: Analysts concentrate on the internal shifts to identify any  relevant information pertaining to a currency’s performance. This helps them decide the exchange price.  

  • Historical performance of a currency: Typically, traders follow a  pattern of behaviour under similar market conditions. The analysts determine indicators based on these patterns to show its effect on the price movements of a currency pair.

 

Technical analysis also depends on other indicators such as:

  • moving average
  • volume and volatility
  • oscillators

 

Fundamental analysis is based on financial statements, whereas, technical analysis emphasizes on charts to determine the price movements of a currency.

 


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