It is always advisable to analyse the market before transacting Forex. There are two methods of analysis: fundamental analysis and technical analysis.
The fundamental analysis examines economic and political influences on currency. Every day something happens: politicians make decisions, events occur and economic data is published. Certain factors can influence the currency very strongly while others have no significant influence.
The biggest influence on a currency is a country’s central bank because it determines the monetary policy. The crucial economic indicator is the bank’s key interest rate - its interest rate for lending money. (The exact names for the key interest rate differ from country to country: in the USA, it’s called the ‘federal funds rate’.)
How can the key interest rate influence the currency? If it’s increased, the volume of money supply shrinks and inflation falls. This all leads to a strong currency. If this rate drops, the result is the opposite.
Other important economic indicators are:
Gross Domestic Product (GDP): the monetary value of all finished products and services within a certain country in a certain period (usually a year). The increase of GDP means the growth of the whole economy and has a positive effect on the currency. Any decline influences the currency negatively.
Trade balance: the difference between the monetary value of all exports and all imports of a certain country in certain period. If the trade balance is positive (trade surplus), it means that the monetary value of the country’s exports is greater than the monetary value of the country’s imports. This has a positive influence on the currency. The trade deficit (where the monetary value of imports is bigger than the monetary value of exports) has a negative influence.
Unemployment rate: the number of unemployed workers expressed percent in a certain country. The target of every country is to reach full employment as high unemployment influences the currency negatively.
Technical analysis examines price charts. These reflect the psychology of all traders on the market and economic indicators. The important rule to realise is that history repeats itself because what has happened in the past will happen in the future again. Analyse the history of the price charts and you stand a good chance to predict future price movements. Traders who use technical analysis also try to find certain price chart patterns to help their decisions.
Resistance and Support lines
- The resistance line connects at least two significant highs and lirevents the exchange rate moving higher.
- The support line connects at least two significant lows and lirevents the exchange rate moving lower.
- The exchange rate can rebound from either line and change direction.
The “ascending triangle” pattern can be found in bullish markets. With this, the resistance line is horizontal and the support line increases. If the exchange rate breaks through the resistance line, it is the possible market entry point. After this, the direction of movement remains the same.