There are two commonly used strategies in the forex market: technical analysis, which deals with reading the charts, and fundamental analysis, which deals with reading the news. Some traders used both to analyze the market, and some preferred one. However, the most used strategy is Technical analysis.
This type of strategy analyzes the economy of a country. Fundamental analysis focuses on a country’s current and future outlook to determine whether the country’s currency may strengthen or weaken.
Fundamental analysis in the forex market is often used to predict long-term trends; however, short-term traders strictly use it on news releases. There are many fundamental indicators of currency values released at many different times, such as:
1. Non-farm payroll (NFP) figure is a key economic indicator for the United States economy. It measures the number of workers in the U.S., excluding farm employees, government employees, private household employees, and employees of nonprofit organizations. Non-Farm Payrolls (NFP) releases create volatility in the forex market. It measures net changes in employment jobs, and forex traders often use an economic calendar to prepare for NFP releases. Non-farm payroll data is normally released on the first Friday of every month at 8:30 AM ET.
2. Purchasing Manager Index (PMI) is an important indicator of the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure and manufacturing economic activity of a country. About 500 purchasing managers are asked to grade the relative level of business conditions regarding employment, inventory level and new orders, state of production, and supplier deliveries. A reading above 50 indicates growth in the sector. Conversely, a reading below 50 points to a contraction. This data is released one day after the month. Traders normally set their calendar for this report.
3. Consumer Price Index (CPI) is a critical indicator that has a major influence on forex trading. This indicator leads to changes in monetary policy by the central bank that will either strengthen or weaken the currency against rivals in the markets. Forex traders are advised to keep track of the CPI of most major trading nations like the US, EU, Japan, and Australia.
4. Retail Sales: This is an important factor when it comes to forex trading. It provides insight into an economy’s health and has far-reaching repercussions that shape the economic climate. An increasingly positive retail sales climate may prompt increased interest in the currency, while a deteriorating retail sales climate may push away potential investors. By monitoring the developments of the retail sales data, you can gain invaluable insights into your forex trading plans.
5. Durable Goods are new or used items generally with a normal life expectancy of three years or more. It is a key indicator of future manufacturing activity. This government index measures the dollar volume of orders, shipments, and unfilled orders of durable goods. When the index increases, it suggests demand is strengthening, which will probably result in rising production and employment. A falling index suggests the opposite.
Reports are important indicators. However, watching the Federal Open Market Committee and Humphrey Hawkins Hearings meetings keep traders high or a low with a country’s currency.
To master this strategy, simply reading the reports, watching and examining a country’s economy can help forex fundamental analysts better understand long-term market trends and allow short-term traders to profit from extraordinary events. If you choose to follow a fundamental strategy, keep an economic calendar at hand to know when these reports are released. Your broker should provide you with real-time access to this type of information too.
Most traders use this strategy to analyze price trends. In forex, the commonly used technical analysis indicators are:
Fibonacci Studies is an indicator that pinpoints and identifies key support and resistant levels in price movement. It helps indicate where to place orders for market entry, taking profits, and stop-loss orders. Fibonacci levels are commonly calculated after a market has made a large move, either up or down, and seems to have flattened out at a certain price level.
The Elliot Waves is a wave principle that was discovered by Ralph Nelson Elliott back in 1934. He discovered that the stock market moves in a particular pattern, forming repetitive cycles. These cycles were reflecting the predominant emotions of investors and traders in upward and downward swings. These movements were divided into what he called “waves.“
He believes that if you can correctly identify the repeating patterns in prices, you can predict where the price will go (or not go) next. This is what makes Elliott waves so appealing to traders.
Parabolic SAR is a technical indicator that helps to determine the direction of price action. It is sometimes called the stop and reversal system. When there is a move against the trend, the indicator gives an exit signal when a price reversal could occur. A small dot is placed below the price when the asset’s trend is upward, while a dot is placed above the price when the trend is downward.
A pivot point is a technical analysis indicator used to determine the overall trend of the market over different time frames. This indicator is designed to calculate the potential turning point of a bullish or bearish market. Currency traders see pivot points as markers of support and resistance.
Many traders combine these studies to make more accurate predictions of the market. The most common combination practice, though, is the Fibonacci studies with Elliott Waves.