Forex.com Tutorial

Analysing the Forex Market

Before most traders “push the button” to execute a trade, they’ve usually established a carefully thought-out trading plan or strategy. Typically, a trading decision is reached after thorough research and analysis of the market. While there are a number of ways to gather information about currencies and the markets in general, most methods can be categorised into two distinct methods: fundamental analysis and technical analysis. Traders will usually lean towards one method or the other, but a combination of both types of analysis can prove quite useful.

Fundamental Analysis

In Forex, fundamental analysis is defined as a method of evaluating a currency by attempting to measure its intrinsic value through an examination of related economic, financial, and other qualitative and quantitative factors. In other words, a fundamental trader will look at economic conditions around the world to see how they may affect the value of a nation’s currency. To get an understanding of the world’s economies, fundamental traders will earnestly await recurring releases of economic data and interest rate decisions. Economic data, or indicators, are available from nearly every country and economic zone, and typically can be a major factor in market volatility upon its release.

While there are numerous reports and data for each country and economic zone, a few key reports have the highest impact on the major currencies. These are the ones forex traders generally watch most closely, and they’re shown below.

KEY ECONOMIC REPORTS
NAME COUNTRY FRECUENCY
UK Unemployment UK Monthly
Non-Farm Payrolls US First Friday of every month at 1:30PM GMT
German IFO Index Germany Monthly
Gross Domestic Product (GDP) US/UK/Germany Quarterly
Retail Sales US/UK Monthly
PMI UK/China/Germany Monthly
Trade US Quarterly
Consumer Price Index (CPI) US/UK/Eurozone Monthly
FOMC Meeting US Every 6 weeks
ECB/BOE Meeting UK/Eurozone Monthly

Technical Analysis

Unlike fundamental analysis, technical analysis does not try to measure a currency’s intrinsic value. Instead, a technical trader evaluates a currency by examining statistics generated by the market, namely past prices and price levels. To help make sense of these statistics, a technical trader relies heavily on price charts. It is from these charts that a technical trader defines levels, trends, and patterns. Trading decisions and trading opportunities are ultimately found “in the charts.”

Although there are several methods of technical analysis, one of the most common and important methods involves the use of significant price levels called support and resistance. Learning how to define these levels can greatly benefit a new trader, and serves as an excellent first step into the world of technical analysis.

A support level is defined as a price level at which a currency has had difficulty falling below, and is generally thought of as a level at which many traders will be willing to buy a currency. A currency will commonly fall to the support level and pause before ultimately making its next move. Many traders will look to buy a currency at the support level, as they believe the currency will then receive a “bounce” to a higher level.

The opposite of support, resistance is defined as a price level at which a currency has had difficulty rising above. Typically, a currency will rise to the resistance level, pause, and then retrace downward somewhat. Traders will often look to establish a short position around resistance with the hopes that the currency will fall back down.

Used together, support and resistance can help a trader identify new trading opportunities in many situations and across multiple timeframes. When defined on the same chart, support and resistance levels can create a channel where a currency spends time simply bouncing from one level to the other. The currency might touch these levels many times, and the length of time in which it remains in the channel can be quite long. When a channel is found, traders may look to enter the market at support and exit at resistance and vice versa.

A sample chart showing areas of support and resistance on the FOREX.com trading platform.

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