Market Analysis

Understanding the Basics of Analysing the Markets


Foreign Exchange market experiences countless changes over the day, and can be hard to predict. However, traders can use economic tools in order to clarify market movements and become able to predict future directions of some or even all financial instruments.

The basis of all aspects of understanding the markets is Market Analysis. This tool is divided into two sections:

Fundamental analysis

This kind of analysis focuses on the  macro level of market conditions worldwide. Certain economic indicators and major financial announcements can strongly affect relevant currency rates or even reverse the whole market direction. Each country's currency is affected by its national events and conditions, but major countries like the United States of America can affect also the trading trends of other countries and markets. Here is an example of some fundaments announcements and events which may strongly affect currencies value:

  • Interest Rate: A country's interest rate is a leading indicator to its economic condition, therefore interest rate announcements highly affect currency values and may cause extreme volatility when take place.
  • Trading Balance: Each country publishes its record of imports and exports which is called the trading balance of this country. This publication, similarly to the interest rate. Indicates the economic condition of a given country. For example, massive export and minor import will act as an indicator for a strong and internationally independent country, a fact which is likely to raise the value of its currency.
  • Inflation Rate: In addition to the above, the inflation rate strongly reflects countries' market conditions. A high inflation rate is typically related to economic difficulties and financial crises, while low inflation reflects a strong labor power and available working places reflect the development of countries' economies.
  • Geopolitical events: Although financial publications are crucial for currency movements, other forces may have significant effect on countries' currency value. One example for that is a given country's geopolitical condition. Countries at War or major diplomatic conflicts may lose or gain international popularity, a fact that strongly affects currency values. Therefore, Political and diplomatic events are a major part of a proper fundamental analysis.

Technical Analysis

In this kind of analysis, future-prices are estimated according to previous performance of each trading pair. That is, using mathematic calculations, formulas and statistic, technical analysis grants us with a forecast concerning the direction of each trading instrument. This kind of analysis consists of a countless amount of indicators, parameters and techniques, a part of which we will present above.

  • Charts:

    Your MetaTrader4 trading platform allows you to view currency pair movements at three major chart types:

    1. Line Chart: A linear illustration of opening and closing prices over a certain period of time. You can choose the period of time you prefer on your trading platform. If for instance you chose 1 hour period, a linear chart will connect the opening and closing prices of every trading hour.
    2. Bar Chart: This chart is consisted of vertical bars which illustrate the performance of the trading pair over a chosen time period, when the opening and closing prices are marked by horizontal axis on each bar.
    3. Candlestick Chart: Based on the Bar chart, the candlestick chart illustrates currency movements over a given period of time, using candlesticks starting at the opening price and ending with the closing price, marking the highest and lowest prices of a given period using a bar extension of the candlestick in case they exceed the opening/closing price.
  • Indicators:

    In addition to graphic appearance and simple lines, your trading platform offers countless amounts of applicable indicators, which operate according to sophisticated formulas and mathematic calculations, helping to predict a trading pair's direction.

    1. Moving averages: this kind of indicators calculate opening and closing prices of previous trading periods using several calculation formulas. This way, traders can observe and identify previous trends and directions. There are several moving average indicator types, some giving importance to certain parameters, and some to others.
    2. Stochastic oscillators: Those sophisticated indicators take in mind the history of a given trading pair with accordance to current and recent performances, using various sorts of formulas and a range of variables combinations. Those indicators help traders to better understand the suitable momentum for buying or selling.
    3. Support, Resistance, Channels and Triangles: Support and Resistance lines are among the most used terms at the technical analysis terminology. Those lines indicate the points where a trend is expected to reverse, while a braking of this line indicates a strong trend direction. A support line marks the lowest point of a bullish trend, while a resistance line marks the highest point of a bearish trend. Not like the horizontal support and resistance, the triangles are formed usually according to a period of three weeks or three months and can appear as upward, sideways or downward sloping.
      Those options help traders to identify a profitable moment of breakdown and increase profits by opening a position at the right momentum.