“Types of Market Analysis

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 25.04.2020>

Dear reader,

Hi! If you are interested in online trading you should read the below that provides important information regarding the different kinds of analysis that exist.

 

Fundamental Forex Market Analysis


One way of anticipating price movements in the forex/CFD market is by analyzing the economic, social, and political forces that may affect the supply and demand of the asset you are trading. This type of analysis is called fundamental analysis.

You need to pay close attention to changes in newly released economic indicators such as interest rates, employment rates, and inflation.

For example, a country with a strong and growing economy will experience stronger demand for its currency, which will work to lessen supply and drive up the value of the currency. So, essentially, it all boils down to the basic principles supply and demand. The real challenge however, is analyzing all of the factors that affect supply and demand. Attempting to put various pieces of economic data in context to make them comparable requires a lot of work and discipline.

These factors may include for example, GDP growth rates, potentially disruptive geopolitical events, employment statistics, interest rates, and balance of trade reports among others. By assessing the relative trend of these data points, a trader is essentially analyzing the relative health of the country’s economy and determines the future movement of their currency.

The forex market is ruled by global interest rates. A currency’s interest rate is probably the biggest factor in determining the perceived value of a currency.

A country’s central bank sets its monetary policy, such as interest rate decisions. Too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI (Consumer Price Index) and PCE (Personal consumption expenditures price index).

Economic indicators provide some insight into how well a country’s economy is doing. Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction.

The market tends to react based on how people feel. These feelings can be based on their reaction to economic reports, based on their assessment of current market conditions.

For traders trading stocks CFDs, they look at the company’s most recent earnings reports, expenses, assets, and liabilities.

Fundamental traders will use those data points to determine the health of the company. If their economic wellbeing is trending better as their company’s earnings and balance sheet are growing, then a fundamental trader would choose to place a buy position on that firm’s stock in anticipation of demand growth for that stock.

 

News Trading and Economic Data


Typically, employment reports, interest rate decisions, and GDP numbers are what is considered important news. This news can affect monetary decisions by central banks. If the data paint a picture of a strong economy for example, central banks will likely opt to raise interest rates which in turn typically cause their currency to rally.

Since the U.S. dollar is on the “other side” of 90% of all currency trades, U.S. economic releases tend to have the most pronounced impact on the market.

 

News Trading and Economic Calendar


When trading the news, a trader needs to know which key releases are actually expected that week.

Many sources, including a broker, provide its traders with a complete Economic Calendar of the world’s biggest financial announcements that will take place as well as what the projected value will be.

Some of the most important economic events that drive Forex price movement include:

-Benchmark Interest Rate Decisions: Central bank rate decisions.

Inflation Data: can significantly affect central bank monetary policy.

-Key Jobs Data – Unemployment rates and the number of people receiving

-benefits for unemployment. U.S. Non-Farm Payrolls data in particular.

-Preliminary GDP Data – A country’s gross domestic product.

Trade Balance and Current Account Data.

 

What is Market Consensus Market consensus is one of the most important concepts to understand when contemplating trading market news releases. Simply put, consensus refers to the average expectation of financial analysts and market participants for a particular economic report. (market “standard”).

If the observed result is better than what analysts were expecting, related assets tend to edge higher in value. On the contrary, if the result turns out to be weaker than market consensus, then investors will be disappointed and prices will likely drop.

Sentiment Analysis  (a view or opinion that is held or expressed.) The market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market.

As a trader, you must take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create trade plans.

 

Technical Analysis


Technical analysis is the study of the price movement of a particular Forex currency pair or CFD asset in order to find some indication of future price direction. Technical analysts believe for example that a company’s fundamentals, along with broader economic factors and market psychology, are all priced in.

This, therefore, makes only the analysis of price movement necessary. Essentially, technical analysis attempts to forecast future price movements by examining past supply and demand changes as these are reflected in changes in the price of an asset over time.

 

Price Charts and Historical Price Data


Technical analysis traders rely on price charts, volume charts, and other mathematical representations of market data, also known as indicators, to try and predict the ideal entry and exit points for their positions. Some indicators can help traders identify a trend, while others help determine the strength and sustainability of a trend over time.

 

Price Moves in trends


Price movements are believed to follow trends.

This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it.

Most technical trading strategies are based on this assumption.

 

Technical Analysis and Price Charts


The most fundamental principle of technical analysis is that the price reflects all relevant information. Thus, fundamental data about the security does not need to be included into the analysis.

The underlying logic is that most of the price movement is driven by human beings. Therefore, all market variables are reflected in price movement, and since humans are creatures of habit, certain patterns tend to repeat themselves in the market.

 

History tends to repeat itself


Important idea in technical analysis is that history repeats itself in regular, fairly predictable patterns. These patterns, generated by price movements, are called signals. A technical analyst’s goal is to uncover a current market’s signals and place his positions accordingly.

 

Self-Fulfilling Expectations


Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price will act the same way that it did before.

What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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