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"Forex Thoughts" Articles

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Thought provoking and informative articles about forex trading.

Forex Thoughts articles by Dirk du Toit


The Forex Market

Forex Trading

Forex Brokers

Forex Traders

FX Brokers vs FX Traders

Forex Trader Types

Forex Trading Styles

Forex Analysis

How to Analyse the Forex Market

Definitions

An examination of the changes in the forex market that are used by a trader to determine whether to buy or sell a currency pair at any one time. Forex analysis could be technical in nature, using charting tools, or fundamental, using economic indicators and/or news-based events. (From www.investopedia.com)

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Technical analysis

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action.

Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. (From www.easy-forex.com)

6 Most Important Points about Technical Analysis of Currencies

  • Price action / behaviour discounts everything
    • This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.

  • Prices move in trends & ranges
    • Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.

  • History repeats itself
    • Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.

  • Trading volumes are important
    • Forex data sets don't include volume. This is not recognized by most technical analysts in the forex market. The wrong assumption is usually made that relative big price moves in an observed time interval equals large volume. However the opposite is rather likely because that large and erratic price moves result from illiquidity!

  • Technical analysis is a vast field of study
    • There are many different sub-fields in technical analysis theory, like:
    • Chart types: Point & Figure and Candlestick charts are examples of complete sub-fields on its own.
    • As for the analysis of the underlying data there are different categories:
      • Number theory (Fibonacci & Gann)
      • Wave theory (Elliot waves)
      • Statistical Indicators (Moving averages, RSI etc)
      • Gap theory (Highs & Lows / Open & close)
      • Price patterns (Triangles, head&shoulders etc)
      • Price action (Candlesticks & price confluence)

  • A major flaw of intraday technical analysis
    • According to T/A theory all technical analysis is perfectly applicable on any time interval. This is a very problematic assumption in the absence of volume data in the forex market and considering that the majority of the $2 trillion traded per day (on the spot market) is traded by the wholesale (banks & institutions) sector and not retail traders.

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    Fundamental Analysis

    Fundamental analysis is a macro or strategic assessment of where a currency should be trading based on any criteria but the movement of the currency's price itself.

    These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
    (From www.easy-forex.com)

    5 Most Important Points about Fundamental Analysis of Currencies

  • Fundamental analysis focuses on the "bigger picture"
    • Currencies don't exist in a vacuum.

      The way currency prices move on say 15 minute charts is not delinked from the fundamental drivers behind larger currency price moves.

      Multi week, multi month and even multi year currency market trends are based on fundamental drivers that cause sustained demand or supply in the wholesale sector of the market.

      The fundamental drivers don't change often and there are also not many core drivers.

  • Forex News Trading is not "Fundamental Analysis"
    • Forex news trading is an intraday timing tool. The content of the news releases are only vaguely and very indirectly related to the underlying curreny market drivers (fundamentals).

      The best way to understand this is that the news trading time horizon excludes the concept of a trend. Any new (surprisingly new!) news information from economic data releases or other scheduled and expected news events are instantaneously priced in and depending on the importance of the news this will have a larger or smaller, but still very fast, price impact.

  • F/A looks back and asks: "What is already discounted in the latest price"?
    • Whereas technical analysis assumes it is enough to know everything is in the last price, fundamental analysis is highly interested in the content / composition of that "everything"!

  • F/A looks ahead and asks: "What is not yet discounted in the current price"?
    • Because there are so many participants in the global investment space with many different investment objectives of which many are influenced by different market developments, not everyone makes the same global investment and thus foreign exchange transactions simultaneously. For this reason fundamental analysis will continuously "track" the market developments associated with the factoring in of global investment themes in forex prices.

  • Forex Fundamental Analysis must consider intermarket factors
    • The forex market is primarily a market where huge global investment fund flows and associated speculation activities are executed. Global investments involve all financial markets, cash, bonds, commodities, stocks, all sorts of derivatives and also fixed direct investment. Decisions made by global investors in different markets all impact on the forex market fundamentals to some extent as everything is interrelated.



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