Sunday, May 3, 2009

Forex Market Analysis

The Forex market is run by means of supply and demand. When the demand for a currency rises, its price also increase and once there are more supply of a certain currency its value falls. This might be easy enough to understand but unluckily predicting fluctuations in currency prices can be very challenging.

There are two key approaches used to forecast currency price movements in the Forex market:

The Fundamental Analysis

Fundamental analysis was the most popular forecasting tool used in the Forex market until the mid 1980s, though it has subsequently becoming unpopular. Fundamental analysis puts its focus on the economic,social and political factors which propel supply and demand and is greatly based on elements like economic growth rates,inflation and unemployment . All of these diverse indicators evaluates a currency's current performance and then to forecast its upcoming movement.

The drawback with fundamental analysis is that the trader needs to track events and to evaluate a vast amount of information. Also, there are much discussions about what information needs to be counted in any fundamental analysis and how much importance should be put on each of these indicators.

On point in which there is common understanding is that a country's balance of payments is a mechanism to fundamental analysis because it shows the movement of for a certain country. In principle, a zero balance of payments will create a steady price while a deficit or excess will trigger the currency to drop or rise.

Technical Analysis

Technical analysis is based plainly upon movements in currency prices and uses past price information to forecast upcoming prices.

The core notion with technical analysis is that history repeats itself and that price movements at the moment simply follow some patterns. Secondly, it is not essential to examine present market data to forecast movements in the market since this is reflected already in current currency prices. It is merely the changes in prices that needs to be considered in order to forecast the future prices of currencies.

Technical analysis uses the charts of past currency performance to present a graphical interpretation of the forex market with time and allows the trader to easily grasps trends of price changes. There are many charting techniques used nowadays including oscillators, moving averages, Fibonacci retracement levels,candlestick charts and others.

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