Analysis is very important in every human trade, although it is almost never easy to do and usually takes a lot of time. Analysis makes decision making a lot easier and the outcome is usually satisfactory. When trading on Forex, analysis is very important because you can’t rely only on the money management strategy to succeed. You can forecast the direction of the market basing on your technical and fundamental strategies to see their effectiveness.
You'll be able to make forecasts of price movements by applying the past data of the prices and graphs to the technical analysis methods. You can predict future prices with the level of accuracy dependent on your technical analysis skills using the graphs of the rates you observe. Trading with some brokers you can see technical indicators along with the graphs. You can apply it to your demo account and estimate your prediction skills necessary for planning trading decisions.
It is impossible to choose the most effective indicator among lots of various ones. Each trader has to decide for himself which indicator is best for him. You can't find any magic formula; you just see the graphs, make your forecasts and find out whether they come true seeing the values in the news later. There are a lot of technical analysis indicators available but here are the ones which are the most wide-spread: the Moving Average Convergence Divergence (MACD), the Bollinger Bands, Pivot Points, RSI, Stochastic, Fibonacci, EMA, Elliot Waves.
Fundamental analysis is another tool that maximizes your profit and minimizes your losses on the trades. There are some traders who prefer only one kind but the majority prefers both. Fundamental analysis means trading following the news, e.g. telling about the economies or unemployment rate in the countries of the currencies you trade. They can also tell about the events that can have a strong influence on the currencies' exchange rate.
Fundamental analysis studies the core underlying elements that influence the economy of a particular entity, like a stock or currency. It attempts to predict price action and trends by analyzing economic indicators, government policy, societal and other factors within a business cycle framework.
In other words, if a particular country has a successful economy, its currency value will grow, if the economy is going through a rough time the currency value will fall.
Things that affect economy are called economic indicators. They are snippets of financial and economic data published regularly by governmental agencies and the private sector. These statistics help market observers monitor the economy's pulse - so it's no surprise that they're religiously followed by almost everyone in the financial markets. With so many people poised to react to the same information, economic indicators have tremendous potential to generate volume and to move prices. It might seem like you need an advanced economics degree to parse all this data accurately - but in fact traders need only keep a few simple guidelines in mind to making trading decisions based on this data.
Most important economic indicators are:
1. Gross Domestic Product (GDP)
2. Industrial Production
3. Purchasing Managers Index (PMI)
4. Producer Price Index (PPI)
5. Consumer Price Index (CPI)
6. Durable Goods
7. Employment Cost Index (ECI)
8. Retail Sales
9. Housing Starts
All of these things affect economy in some way and should be taken into consideration when making fundamental analysis if you want to maximize your profit and minimize your losses on trades.
Technical analysis attempts to forecast future price movements by examining past market data. Most traders use technical analysis to get a "big picture" on an investment's price history. Even fundamental traders will glance at a chart to see if they're buying at a fair price, selling at a cyclical top or entering a choppy, sideways market. History repeats itself. The techniques which were effective in the past can be still effective to forecast future price movements.
Technical analysis predominantly uses charts to forecast future price movements. Nowadays it is not necessary to draw charts on paper as the process is automated by specially designed computer programs.
There are three sources for the technical analysis: price, volume and open interest . Price discounts everything. Price is affected by economic, political and other factors, and all information is already reflected in it. Technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future. Price movements are not totally random, or prices trend. The main purpose of the charts is to define a trend at an early stage and to trade in accordance with its direction.
Technical indicator types:
Using Technical Indicators
Price charts help traders identify trade-able market trends - while technical indicators help them judge a trend's strength and sustainability.
If an indicator suggests a reversal, confirm the shift before you act. That might mean waiting for another period to confirm the same indicator's signal, or checking out another indicator. Patience will help you read the signals accurately and respond accordingly.
There are a lot of different types of charts that you can use in Forex trading. The most popular ones are line chart, bar chart and candlestick chart, so I’ll try to explain to you what these are, how they are made and what they look like.
1. Line chart
Line chart or line graph is a type of graph created by connecting a series of data points together with a line. In Forex bar charts are plotted with time on the x-axis and the currency pair on the y-axis. Each time period on our real time charts can range from a tick by tick to a weekly interval (the tick refers to each individual pip movement). This gives traders the flexibility to view currencies with closer examination while also allowing them to spot the trends most suitable for their time-sensitive trading strategy. A line chart's strength comes from its simple design; it provides an uncluttered, easy to understand view of a currency's price. Line charts display the currency's closing price. A line chart is simply a graph of the value of a currency taken at regular time intervals based on current prices.
2. Bar chart
A bar chart or bar graph is a chart with rectangular bars with lengths proportional to the values that they represent. Bar charts are used for comparing two or more values. The bars can be horizontally or vertically oriented. Sometimes a stretched graphic is used instead of a solid bar. It is a visual display used to compare the amount or frequency of occurrence of different characteristics of data and it is used to compare groups of data. Standard bar charts are commonly used to convey price activity into an easily readable chart. Usually four elements make up a bar chart, the Open, High, Low, and Close for the trading session / time period. A price bar can represent any time frame the user wishes, from 1 minute to 1 month. The total vertical length / height of the bar represents the entire trading range for the period. The top of the bar represents the highest price of the period, and the bottom of the bar represents the lowest price of the period. The Open is represented by a small dash to the left of the bar, and the Close for the session is a small dash to the right of the bar.
3. Candlestick chart
A candlestick chart is a style of bar-chart used primarily to describe price movements of equity over time. It is a combination of a line chart and a bar chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated. Candlestick Charts identical to a bar chart in the information conveyed, but presented in an entirely different visual context. The candlestick encapsulates the open, high, low and close of the trading period in a single candle. Candlestick charts are on record as being the oldest type of charts used for price prediction. They date back to the 1700's, when they were used for predicting rice prices. In fact, during this era in Japan, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He is said to have executed over 100 consecutive winning trades. Candlestick charts are much more visually appealing than a standard two-dimensional bar chart. As in a standard bar chart, there are four elements necessary to construct a candlestick chart, the Open, High, Low and Closing price for a given time period. A candlestick can either be solid or transparent. Its appearance depends on the relationship between the opening and the closing price. If the close is higher than the open, the candlestick is transparent or empty. Candlestick charts are much more "visually immediate" than bar charts. Once you get accustomed to the candle chart, it is much easier to see what has happened for a specific period - be it a day, a week an hour or one minute.
Which Analysis should I use?
This is a question that many people have asked themselves. There are people that think that only the fundaments move the market and that everything you find on a chart is just a mere coincidence. On the other hand there are people who think that only the technical part is important and that you can find all you need to trade and foresee future prices by looking at the charts. The truth is that this two fulfill each other and make a perfect couple. If you master both of this analysis success will come in its time.