Forex Market Analysis in Simple Terms

By: Sara Patterson

There is a well-known ongoing debate in the financial markets that is also very common among Forex experts. I am referring to the various tools one can use to analyze the market and ultimately predict future trends.

Before we get into which analysis is more effective, let’s first discuss why analyzing the market is crucial for your Forex success. There is a widespread and common misconception that compares Forex trading to casino gambling. This is a false comparison on so many levels.  First and foremost is that by utilizing some of the many resources available to a Forex trader, the luck element of the trading all but disappears.

Using Different Types of Analysis

When putting market analysis at the forefront of your trading, you are transforming the entire trading experience from a guessing game to a legitimate and profitable experience.
Now that we have established the need for Forex market analysis, the question arises, which one should a trader use? There are two primary schools of thought surrounding the issue of Forex market analysis. There is the technical analysis paradigm that swears by the phrase “The trend is your friend”. The basic concept is that Forex trends have no reason to reverse themselves, unless they do. What that means is that if there is a certain trend on the market, it is the safest bet to jump on that trend. Chances are, according to the technical analysts that the trend will continue.

On the flip side, experts who believe in fundamental analysis will tell you not to focus on reading the charts but rather to watch and read the news. The fundamental analysis concept is based on the idea that news and current affairs is what drives the market and ultimately contributes to its volatility.

Finding What Works

So, as a new trader, who should you listen to? The answer, I believe, is that it really does not matter. While technical and fundamental analysis seem to be mutually exclusive since a person only has two eyes and cannot watch both the charts and the news simultaneously, the truth is somewhere in the middle.

The way the cycle works is that yes, there are trends, and yes, these trends can serve as an indication of what the future will bring, but the reality is that those trends are ultimately driven by the fundamentals.

So, as a new trader, it is crucial that you keep your options open and to put that into practical terms, trade with a few screens open. The first screen should be your trading platform. Another screen should have the charts in real time that will show you what the latest trends are. Finally, you should have an additional screen open for the latest political and economic global developments.

Obviously you cannot focus on all three screens at the same second, but it is important not to ignore any of the three and to balance them effectively. This will ensure a well-rounded trading environment that will ultimately lead to a more balanced trading experience that will translate into eventual dollars and cents.

Sara Patterson has a Master’s Degree in political science and enjoys analyzing both current events and the international markets to get a fuller perspective of the currency market. Before turning to financial writing, she taught English writing skills to high-school age students. Sara’s work has been published on various financial and Forex blogs.