The financial market can be very demanding on anyone active in the industry and trading, in particular, requires much more involvement and preparedness. As a trader, you need to be constantly updated and plugged into the developments in the market.
So, how does a trader keep his knowledge and awareness levels continuously sharp and ready?
One of the best practices, even a prerequisite, followed by successful traders is the habit of reading analysis reports.
What Are Analysis Reports?
Forex analysis is an indispensable tool that helps a trader to understand the market conditions before making a decision on whether to buy or sell or hold a position in a currency pair.
Typically, in forex trading, analysing a situation in relation to exchange rates is never done in isolation. As the trading is always done in currency pairs, it is not enough to study just one currency. The implication of a development in one affects the other at the price movement levels.
So it becomes imperative that a trader is constantly monitoring the situation on the currency pair. This is where analysis reports become not just relevant but essential.
Any sudden development needs to be analysed to understand the root cause or the forces that brought about the change. Similarly, in a planning and estimation sense, a trader would need to have his pulse on the market conditions and have a good idea as to where his currency pair is headed.
Will the USD (US Dollar) hold its gains against the GBP (Great British Pound)? Is there a possibility that the EUR (Euro) will weaken against the USD? Can the JPY (Japanese Yen) pick up against the GBP?
These are examples of some of the decision points that a trader has to deal with in trading sessions, day in day out. To ensure that he has the latest and most useful information readily available, he has to depend on hard data. But there is also a problem of plenty there as the amount of type of information can be overwhelming for a busy trader.
This is where analysis reports come in handy for the active trader. These distil the most important data and insights on the forex market in different categories that we discuss below. Analyst reports can form the basis for the trading decisions taken by the trading community and is a key driver of successful trading.
So, here is a closer look at the different types of analysis reports that cover all the information required in forex trading.
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Types of Analysis Reports
There is a range of analysis reports that serve multiple objectives. These can be broadly categorised into three major heads – fundamental, technical and sentiment.
There are changes in the forex market that are triggered based on economic data published by specific countries and globally. These can include key data points like GDP, interest rates, unemployment numbers and trade figures, to name a few. The method of breaking down the impact of political, economic and social factors that may affect currency price is known as fundamental analysis.
The primary objective of fundamental analysis is to identify the political, economic and social drivers and make informed trading decisions. There are a variety of fundamental factors that play a role in a currency's movement and help in forecasting its future prices.
Factors influencing fundamental analysis
1. Interest rates are decided by the central bank is one of the most important factors in determining the price movement of currency pairs. A high interest rate increases the value of a country’s currency and also attracts forex investors towards buying.
2. A high GDP growth rate suggests a growth in the economy of the country and strengthening of the country’s currency as its value increases when compared to other currencies.
3. If the Industrial production is on the higher side it points to a strong economy that encourages forex traders to invest in the country’s currency.
4. The Consumer Price Index (CPI) impacts the currency markets – if the CPI is high, the central bank tries to lower the interest rates to bring down the rate of inflation and stabilize the growth rate of the country’s economy.
5. Retail sales is an important driver that gives a picture of the income level and the health of an economy. A strong retail sale figure means the domestic economy of a country is in strong shape.
6. Economic announces/Central bank meetings across the globe play an important part in shaping the market’s expectation for the future.
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Long-term traders who hold a currency pair for an extended period of time swear by the power of fundamental analysis.
Technical analysis is the science of studying price movement using historical data of price movements. As price is a good indicator of most underlying information concerning the market, a diligently performed technical analysis is usually accurate and reliable. This, in turn, helps traders utilise these analyses to assess present market conditions to predict future movements in price.
Typically, the technical analysis draws on the price flow and trends through the use of technical studies, indicators, and other analysis tools. The trend indicators generally used by traders are moving averages and market strength or momentum indicators such as the moving average convergence divergence (MACD) or relative strength indicator (RSI). Traders can either use a single technical indicator or combine multiple technical indicators together. Technical indicators are important because it can help a trader to know when to enter a market and when to exit it.
For scalpers who make very quick trades, technical analysis can be done on a 1-minute to 5-minute time frame charts. However, for traders holding positions for a longer term, the trading time frames need to be longer, such as from hourly to 4-hour charts, or daily charts.
The forex market is basically a huge network of individual traders. As a majority of the traders’ interpret the fundamental and technical signals, understanding their psychology is also an essential tool in forex trading. Every trader’s views and opinions help to form the general sentiment of the market, irrespective of what information is put out there.
For example, even if the Euro is going to go down, but the big traders or investment banks go bullish on it, the Euro may go up.
So, how do you gauge market sentiment? There are technical indicators that can help measure market sentiment for currencies and currency pairs, like the Volatility Index (VIX), NASDAQ Volatility Index (VXN) and NYSE 200-Day Moving Average.
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Why Traders Should Read Analysis Reports
Go beyond regular news
There is enough business and market-related news that gets published daily in print and, especially, online. This is a good practice and staying abreast of news and updates through any channel certainly can be useful.
But in a trading environment that is fast, ever-changing and thoroughly demanding, the level of intelligence a forex trader needs to be much sharper and nuanced. There is a level of specialisation and relevance that is needed in a report backed by data with a topical focus.
Reading general news is time-consuming and cumbersome whereas reports that are grounded in analysis helps to give a better perspective and direction.
Preparedness to plan for trading
So, arming a forex trader with all the relevant analytical reports – whether it is based on fundamentals, technicals or sentiment – readies him to enter the trading arena with confidence.
Regularly reading up on analysis reports also makes you ready to pre-empt sudden changes that might come up. For instance, sentiment analysis can give a trigger on what to expect just as fundamental analysis prepares you to anticipate the fallouts of a development, whether with precedent or unprecedented.
Get a long term view too
While analysis reports are indispensable for day to day trading, they have a life beyond the time of the trade. The data and the insights can be useful if interpreted in the longer term and can give an outlook for the future as well.
This is particularly true when fundamental analysis throws light on developments that can impact medium to long term trading. Similarly, technical analysis packs in historical data and charts that can be extrapolated for trading in the future.
Useful for all types of traders
Reading analysis reports are certainly not only for beginners who are entering trading. In fact, experienced traders also rely heavily on data and trends and refer to them regularly.
Also, analysis reports need to be read by all types of traders – day, scalpers, swing and positional traders too – as the underlying information can be processed and used, regardless of the strategy adopted.
Helps improve the quality of trading
Analysis reports are not a ready tip or an exercise in spoon-feeding a novice trader or one who is not committed to learning. These are, instead, not even buy or sell recommendations but a compilation of data meant to stimulate a trader into interpreting it intelligently.
Besides arming the trader with useful information, regularly reading analysis reports and using them appropriately helps a trader understand forex trading better to make more informed decisions.
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