Forex Analysis Fundamentals

Last Updated September 8th 2021
7 Min Read

Forex market can be very volatile at times - there is always the risk of losing money when trading a currency pair. Anyone who is aspiring to be active in the forex market needs to know the basics of trading, what influences them, and how trading works. A forex trader has to constantly update and be aware of the financial, political, and economic developments around the world. And being a volatile market, you will need to be able to tolerate a certain level of risk.

There are many ways a trader can keep himself/herself abreast of the news, updates and information required to be well-prepared and ready for forex trade. One of the best ways to be a successful trader is forex analysis.

What is Forex Analysis? 

Forex analysis helps a trader to analyse the market conditions before making a decision on whether to buy, sell or hold a position in a currency pair. But there is a catch - forex trading is always done in currency pairs, so a trader needs to analyse not just one currency’s exchange rates, but both. For instance, the USD may hold its gains against the EUR or may weaken against the GBP.

In short, the effect of movements in one currency can affect the other one. It is not easy to relentlessly monitor the position of a currency pair and this is where forex analysis saves your day. 

Check Out: Analysis Paralysis: How To Beat It And Take Back Control

Types of Forex Analysis

Forex analysis can be broadly categorised into fundamental and technical analysis.

Fundamental analysis

Forex markets are heavily influenced by the economic data published by countries and even on the global level. Some of the major fundamental drivers that can help to forecast a currency’s future prices are GDP, interest rates, consumer price index, unemployment numbers, retail figures, central bank meetings, industrial production, etc. Analysing the influence of political, economic and social factors on the currency price is known as fundamental analysis.

Long-term traders who hold a currency pair for an extended period of time often use fundamental analysis.

Technical analysis

Technical analysis involves the analysis of the price movement using historical data. Technical analysis is considered to be accurate and reliable and is the process of examining past price movements to forecast future price movements. This is done by analysing statistical trends gathered from trading activity, such as price movement and volume.

Technical analysis makes use of multiple indicators like moving averages, market strength, moving average convergence divergence (MACD) or relative strength indicator (RSI) to help a trader know when to enter a market and when to exit it. You could either use a single technical indicator or use more than one technical indicator together.

Technical analysis favours shorter-term traders and can be used on most trading instruments.

Combining Fundamental and Technical Analysis

Traders could experiment with both the techniques of technical and fundamental analysis; if done right the combination could lead to the best of both worlds.

Both types of analysis rely on past and present information. Both the strategies can add value when it comes to managing risk and to the investment decision-making process.

Let us take a look at a few methods of combining technical and fundamental analysis to provide better information to forex investors.

Combining range bound trading with fundamental analysis

Range bound trading is all about identifying areas of support and resistance. The trader tries to capitalise on buying an asset at a lower trend line support and selling it at an upper trend line resistance. So, how can you combine range bound trading with fundamental analysis?

In a range bound scenario there is no solid move in any direction and prices tend to fluctuate from highs to lows. In an up-trending market, a trader is usually looking to buy at the lowest possible level to take full advantage of the market. However, an unexpected press release or news event can interrupt a range bound market. In a situation like this, it is smart to not indulge in open trades around the time of the news release. 

You need to take precautions while trading around high impact news events. You could close the trade, or partially close the trade, or insert tight stop losses in order to not reverse the profits you have made on a successful range bound trade.

Combining breakout trading with fundamental analysis

A breakout trade strategy is an essential tool for technical trend traders. The strategy involves making a note when the shares move beyond their support or resistance level and capitalising on it. When the price of an asset moves beyond a predefined trading range, it indicates that the asset is about to make a significant move.

Key factors like the changes in interest rates, inflation, retail sales, manufacturing and industrial production could bring in the wanted volatility or move the trade closer to the trader’s profit target. Since the possibility of a sharp move at this time is extremely high, it provides a great opportunity to put on a breakout trade during this time. 

However, if traders are combining a breakout strategy with a news release, they would want to wait for news to cause the price to reach support and/or resistance and then look to buy or sell accordingly. Traders can also look to take advantage of overreactions to the news. 

It is always sensible to use tight stop losses as well. This way, you can look for technical breakouts and adjust positions accordingly.

Using Oscillators with Fundamental Analysis

Oscillators are chart indicators that are used to determine overbought or oversold conditions in non-trending markets. These chart indicators are also used to confirm range extremes and to determine the important entry and exit points. Relative Strength Index (RSI) calculates the amount of recent price changes which is used to find out overbought or oversold conditions in an instruments price.

Let us consider an example of using an RSI indicator in combination with a fundamental indicator like a non-farm payroll data release. Non-farm payroll is the number of workers in the United States primarily excluding farm workers. This measure is given by the Bureau of Labor Statistics (BLS) and reported to the public on a monthly basis.

When the numbers are lower than the estimates, it can cause the USD to weaken. So, if you expect that the non-farm payroll numbers to be lower than the estimates, it could cause certain currency pairs to be more volatile, for e.g., EUR/USD could become more volatile, and thus it is a good time to sell. 

Don't Miss: Why Should Traders Read Analysis Reports?

Analysing Historical Trends

Many analysts typically analyse historical trends to determine how certain forex pairs have performed over time. The traders also look at charts to see how a specific forex pair reacted to a certain type of news or economic release.

If you track the reactions over time, you will note that many trends have a tendency to repeat themselves. Similarly, many investors tend to react in a similar manner over time and comparing data over a period will help you to identify any consistent trends. Normally, there is a lot of volatility surrounding press releases of a high-impact nature.

Fortunately, you can keep up with the scheduled key releases and prepare for the major events that influence the price of currencies. You could keep an economic calendar while trading in forex and use it as a guide to some of the upcoming economic releases and political events that are likely to influence the forex market.

For instance, a major global event like an international political meeting with attendance from the world leaders or an economic review with the heads of the main central banks from all over the world could definitely influence the forex market.

Volume Trends

Another prevalent method for evaluating the market is to take a look at the volume trends. Large spikes in a particular currency pair suggest that it has garnered some attention and are under either accumulation or distribution. An increase in the volume means that there are more people buying/selling; eventually, the price will start to move in one direction. However, it will not tell you the direction of the trend that will emerge.

Nevertheless, you could use volume indicators to evaluate market strength or weakness, and also to check if the volume is revealing a price move or a reversal.

Forex analysis reports are indispensible for any active trader. Both technical and fundamental reports take most of the important data and insights on the forex market and are necessary to make great trading decisions.

Forex market is fast, fluctuating and challenging. For a forex trader to succeed, he/she needs to be sharp and have a good knowledge base of both. You need to take a balanced approach when incorporating fundamental and technical analysis into your trading. Take a note of all these points when setting up your next trade and consider adopting some of these methods into your trading strategy.

eToro – Best Social Trading Platform

etoro broker

67% of retail investor accounts lose money when trading CFDs with this provider

Read More:

How To Calculate Your Risk While Trading

How To Trade Volatile Forex Pairs

The Top 10 Forex Currency Pairs to Trade

Managing Currency Risk in Forex Trading

Advanced Forex Trading Techniques

How Much Money Do I Need to Trade Forex?

Importance Of Liquidity And Its Applications In Forex Trading

Top Brokers in
    All Regulated Brokers
    67% of retail clients lose money when trading CFDs with this provider.