Forex Trading is the exchange of foreign currencies over the counter or otherwise and is one of the largest businesses in the world. How big? The 2019 Forex Market saw a daily average turnover of more than 5 trillion dollars USD. That is the kind of market this is.
So to take full advantage of this market, you will have to analyze the market and its extent. There are three main ways to analyze the forex market, which are listed below.
Price movement is studied by traders in technical analysis. The theory of technical analysis states that it is possible to look at historical price movements and estimate the potential price movements and the current trading conditions. The main reason for using this method is that theoretically, the price reflects the current market conditions. It essentially means keeping an eye out for recurring trends in the market and making a trade on the assumption that the pattern repeats itself. The best way to spot and act on repeating trends is by following a chart. Charts provide visual representations of previous data, and using this; it is possible to predict the outcome of the trade to a certain extent.
The central aspect of fundamental analysis is based on supply and demand. Just like in economics, studying the supply and demand market of the Forex trade can increase the chances of fair trade. It involves analysing the political, social and economic aspects of the society to get an idea about the supply and demand of a particular currency pair. The easy part of this is that the price determines the supply and demand of a specific pair; the hard part is that there are a lot of factors determining the supply and demand, and identifying them can be tricky. Understanding the country of the currency you are trading in is very important because it gives an insight into where the pip value may go in the future.
Even though theoretically technical analysis states that price can give a clear picture of the current market situation, it is much more complicated than that. If that were the case, this trade would not have existed because everyone would have done it the same way. Here is where the power of opinion comes in. Traders have their own idea about how a trade might go, and this influences their judgment. And sometimes, to some extent, this might even work against the odds.
Even though all three are considered separate, it is essential to know that knowing all three can potentially help you in the long run. Since each method has its misgivings, it is better to use all three methods together in order to get the best results.