Technical analysis of the two forces that move currency prices: supply and demand. These two forces refer to the wills of buyers and sellers to move the quotes in their favor. It should be mentioned that supply and demand are not only the decisive factors in Forex, but in any other type of market.
Next, you will know a progression of techniques that essentially look to dissect the levels of free market activity in the market to decide the conceivable course of costs. Notwithstanding, it is essential to elucidate now that the investigates on these two powers will dependably be deferred contrasted with the Forex ongoing statements.
Just through the best Forex investigation would you be able to decide the genuine greatness of free market activity, along these lines achieving preference over different administrators. There are a few techniques to play out these breaks down, extending from more broad, (for example, major Forex examination) to more particular, (for example, Technical analysis).
This examination available fundamentally has one objective: to arrange monetary standards at the best costs. Knowing the activity and progression of Forex, you can exploit the open doors that few see and in this way make progress.
Forex technical analysis
The technical analysis of the Forex market is a method based on the study of the visual elements of the price chart to determine the future movements of the currencies. This type of analysis is based on an economic theory of the famous economist Charles Dow, which states that “the market discounted everything.” This means that all variations in supply and demand at the end are reflected in the price chart.
In the technical analysis of FX it is not recommended to take into account economic events that are not quantified in the price chart, since they may be unreliable information. However, it is common for Forex traders to combine Forex technical analysis with fundamental analysis to produce more accurate forecasts.
However, as you may have noticed, this method has a great disadvantage: it analyzes prices after the market discounts them, which means that your decisions will be based on delayed information compared to real events.
For this reason, new disciplines have been born within the technical analysis that seek to correct these problems, one of the best known being price action.
Introduction to price action
Within the Forex technical analysis it is possible to find an approach that has gained a remarkable popularity in recent years. This is the “price action”, a method that ignores the famous technical indicators to make forecasts based on bare graphics.
The price action complies with Dow’s postulate mentioned above, although it only considers price fluctuations. The method consists of finding past levels in which the price has been consolidated or bounced, with the hope that in the future it will do the same again.
The price action method is based on the concept of the remaining supply and demand. The theory states that large market participants do not close their orders when they are not met, but simply wait for prices to reach the levels they want. This phenomenon causes the currencies to reach again the levels of supply and demand remaining to fulfill the pending orders of the participants of greater weight in Forex.
Therefore, today’s Forex analyzes carried out by the operators of the price action are based on the wills of central banks, hedge funds, multinationals and other large operators.
As you can see, the most important aspect of the price action is the graphics of the trading platform. Next, we will talk a little more about the graphics and their great importance for currency trading.
Price charts in the Forex market
In Forex, the charts are visual representations of the prices of currency pairs. In the price charts, the history of the market itself is recorded with a high level of detail and precision.
In these charts, prices are analyzed based on time and independent of your trading method (short or long term), you should always keep them in mind.
The graphics date back more than 3 centuries, when they were used in ancient Japan to control the prices of the rice market (Japanese candles come from there). 200 years later, these graphs would begin to be part of the financial exchanges of the planet.
The graphics are a basic aspect of Forex trading, so much so that it is practically impossible to open an operation without first consulting them.
Within the characteristics of the graphics that must be taken into account are the movements and patterns (such as triangles, channels, shoulder-head-shoulder, etc.). However, it is more important to know the forces of supply and demand that lead to these movements and price patterns.
Technical analysis is one of the most popular approaches, although it is not the only one. Now we will explore in more detail the fundamental analysis and its application to the forex market.
Forex fundamental analysis
The fundamental analysis of the FX market is based on the study of economic data to predict prices, such as interest rates, inflation rates, GDP, etc. The basis of the fundamental FX analysis indicates that it is possible that the price of a certain financial asset is incorrect in the short term, although in the end it will be corrected. This price correction leads to fluctuations, which in turn generates trading opportunities. It should be mentioned that, in its most basic form, this type of analysis does not use any kind of technical indicator.
Technical analysis has the disadvantage of being imprecise to determine points of entry and exit from the market. However, it is excellent for predicting future Forex movements.
As mentioned above, economic data from different countries are commonly used in this method. However, you should bear in mind that currencies are not equal to shares and therefore, analyzing a country is not the same as studying a company.
There are several theories within the technical analysis that seek to explain the market and forecast their future movements. Some of these theories are:
– Purchasing power parity: this theory says that assets must have the same price in all countries. If not, the discrepancy will be solved, but not before providing good trading opportunities.
– Parity of interest rates: this theory is similar to the previous one, although it considers exclusively financial instruments. An investment must provide equal returns in any nation.
– Trade balance: this concept refers to the differences between a nation’s imports and exports. If the trade balance of a country is negative (imports> exports), it is a sign that its currency will depreciate. Otherwise, it means that the currency will be valued.
– Model of definition of real interest rates: the theory simply indicates that a currency with higher interest rates will experience an appreciation compared to those with lower interest rates.
– Asset market model: this concept is similar to the trade balance, except that in this case foreign investment is taken into account. The more foreign investment a nation receives, the more its currency will be valued.
When performing weekly Forex analysis, other factors must also be taken into account in addition to the theories mentioned above. For example, unemployment figures, interest rates, GDP, industry figures, etc. they are just some of the elements to consider.
In the analysis of Forex trading it is possible to find two methods to make predictions of the market: technical and fundamental analysis. Although there are many people who use only one of the two approaches, there are some operators that combine them with excellent results.
The economic factors that fundamental analysis addresses, such as inflation or GDP, are ideal for determining the future direction of prices, making it an excellent method for long-term operations. However, in shorter time periods, prices are unlikely to follow stable trends. For this reason, technical analysis is more appropriate in this case, since it allows to take advantage of the “market noise” that occurs in the short term.
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Disclosures & Disclaimers: FUTURES TRADING IS NOT SUITABLE FOR EVERYONE AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS IN FUTURES TRADING OR WITH ANY TRADING SYSTEM OR PROGRAM. CAREFUL EVALUATION OF YOUR PERSONAL FINANCIAL SITUATION MUST BE DONE PRIOR TO DECIDING TO TRADE IN THE FUTURES MARKETS OR ANY GIVEN TRADING SYSTEM OR METHODOLOGY. From: R Quant