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There are two types of analysis applied for analyzing and forecasting the movement of currency exchange rates: fundamental and technical. 1. Fundamental analysis of Forex The fundamental analysis is based on the following statement: currency prices on the Forex market are the reflection of the demand and supply which in their turn depend on fundamental economic factors. The aim of the fundamental analysis is to make middle-term and long-term predictions on the Forex market, and it becomes necessary to conduct research on internal deep reasons for changes in currency exchange rates. Only this type of analysis will make it possible to estimate the prospects of dynamics of the currency demand and supply. Besides, this approach will give the investor the opportunity not to take into consideration short-term fluctuations - market noise. The main drawback of the fundamental analysis of Forex is its complexity; as there are from 20 to 50 fundamental indicators in each country, each of them has its cause and effect relations and many of these relations contradict each other or are reflexive, you will need a whole team of analysts to make decisions. For this reason, the fundamental analysis of Forex for decision making is used by 10-20% of traders according to different estimations, and most of them have skin-deep knowledge of the analysis.Moreover, as we said above, the fundamental analysis is almost useless for short-term trading, so the use of it imposes limitations on the amount of your means. You may simply fail to have enough money for current losses on an open position of several figures (or placing distant stop-orders) which are possible when trading middle-term trends.Fundamental factors influencing currency exchange rates: Trade and investment capital movement indicators (trade balance; current account balance; capital account balance; balance of payments). Aggregated macroeconomic indicators (Gross Domestic Product; volume and dynamics of national expenses; volume and dynamics of national income; national budget deficit/surplus; overall consumption; overall private investment; personal savings rate; volume of exports; volume of imports; unemployment rate). Production and trade dynamics indicators ( industrial production index; capacity utilization; volume of factory orders; industrial reserves; durable goods orders; retail sales; volume of commercial credit; volume of mortgage credit; volume of consumer credit). Labor statistics indicators (productivity; indicators of changes in the number of employed and unemployed). Inflation indicators (consumer price index; producer price index; gross domestic product price deflator; consumer price index for energy; export prices index; import prices index; average hourly earnings; employment cost index). Monetary control indicators (central bank interest rate; planned volume of government securities distribution and redemption; planned volume of the government’s attraction and redemption of external credits (public debt dynamics, money supply: M1, M2, M3). Speculation operations on the currency market. The degree of the development of other segments of the world financial market, for example, of the equity market competing with the currency market.
In the process of decision making, it is necessary to analyze the situation taking into account the following factors:
1. What an indicator measures and how, what data is used to calculate it, what volatility on its exit is, in what units it is calculated (nominal units, dynamics compared with a previous period or some period in the past).2. To what class an indicator belongs (leading, lagging or coincident in relation to the economic cycle).3. What the periodicity and release time of an indicator are.
4. Whether it is published once, or it also has advance, final and revised values.
5. What the indicator’s fluctuation ranges are in different periods of the country’s economic cycle, and also what its minimum and maximum values in the whole history are.6. How it mainly influences other fundamental indicators.
7. What fundamental indicators have a critical influence on it.
2. Technical analysis The technical analysis of the market is a method of predicting prices based purely on the market’s history data – prices, volume and open interest. The technical analysis is a kind of philosophy based on the three postulates: 1. Market movements take into account everything.
It means that any external factor which can influence a price (economic, political, psychological or any other, as well as the interrelationship between these factors) is already included in the price in advance and it is reflected in the price chart, so there is no need to study the influence of fundamental factors, and the price history is enough for price forecast. 2. Prices have trends of movement.One of the main concepts in the technical analysis is the concept of a trend (tendency), or directed price movements. The principal task of a technical analyst is to recognize new trends on price charts at early stages of development, use them in trading, and leave the market in time when trends are over. The main consequence of the postulate that “prices move according to patterns” is that the current trend is most likely to continue its further development but not go into reverse
The trends are divided into the three types:
Bullish trend – the price moves up;
Bearish trend – the price moves down;
Sideways trend– the price almost doesn’t move. 3. The history repeats itself.
This is also a key axiom. It is considered that human psychology is basically unchangeable or is almost unchangeable; anyway, in similar cases the market crowd behaves according to similar scenarios, so if any models worked before (gave you the chance to get profits), there is every good reason to think that they will work in the future as well. This type of analysis involves a series of charts displayed in a trading platform. The charts precisely show the direction of price movement, or the so-called trend, at the real point of time. Most small-scale and middle-scale players on financial markets rely on the technical analysis. |
