FOREX 101 Part II: How To Analyze The Forex Markets? - Rockfort Markets

Rockfort Academy FOREX 101 Part II: How to analyze the forex markets? Written by William B. Rockfort Markets

CONTENTS 1. What is fundamental analysis? 2. What is technical analysis? www.rockfortmarkets.com

About the Author Vishal Rathod has been investing and trading for over past 10 years. He is currently working as Trading Manager and Head of Technical Research at Rockfort Markets. He has worked for leading Equity Research firms in New Zealand and has been doing equity analysis and Technical Analysis from past 5 years. He writes weekly market insights and other articles for Rockfort Markets that offers insights into where the markets are leading and how to better navigate them. Vishal holds a Masters Degree in Economics, and MBA in Finance from Pune University. He has also done Post Graduate Diploma in Business from Unitec Institute of Technology in Auckland, New Zealand. Vishal Rathod Trading Manager, Rockort Markets

Hello and welcome to the second section on the forex trading course. In the previous section, you learned what the foreign exchange market is all about. You also got a glimpse into what forex trading is all about. Armed with the basics of forex trading, this section introduces you to the next part. Unlike stocks, where you study the balance sheet of a company, the forex markets are different. How do you trade forex? There are two main schools of analysis in forex. Fundamental analysis Technical analysis Both these types of studies are different from each other. Yet, they take you toward the same goal, which is to predict price. Let’s start with fundamental analysis in forex. To answer this question, you need to know how you can analyze the markets. Unlike stocks, where you study the balance sheet of a company, the forex markets are different. As you may guess, in forex, we study the macroeconomics of a country or an economy. 4 www.rockfortmarkets.com

1 Fundamental Analysis What is fundamental analysis?

Fundamental Analysis Forex fundamental analysis studies the underlying factors responsible for driving the value of a currency. Fundamental analysis in forex is quite different from technical analysis. Investors use fundamental analysis to study how economic data impacts monetary policy. In forex trading, fundamental analysis can help you gain familiarity with a currency. Let’s take a look at how fundamental analysis in forex is used by traders. Interest rates are responsible for driving the value of a currency in relation to the other. The interest rates are set by a country’s central bank. This is done by assessing the economic indicators. This helps policymakers to decide whether interest rates should rise or fall. Investors use fundamental analysis to study how economic data impacts monetary policy. An economy is strong, as assessed by economic indicators like the GDP, inflation, unemployment, and balance of trade. 6 www.rockfortmarkets.com

Fundamental Analysis In forex trading, the economic calendar plays a major role in fundamental analysis. The economic calendar is a schedule of events over a period of time. These events are economic indicator releases from the respective statistics agencies. The image below gives an example of an economic calendar. What you see in the economic calendar are the following: C urrency/Country: The ISO code of the currency and the country. Example, AUD/Australia ime/Date: The time and date of the economic T indicator release Event name: The name of the economic event. Example: Consumer price index Expected: The expected headline print based on a survey of experts Previous: The previous data point of the last release of the economic event . 7 www.rockfortmarkets.com

Fundamental Analysis How to use the economic calendar in fundamental analysis? Most important economic indicators in fundamental analysis. Trading decisions are taken based on the outcome of the economic data. However, not all economic indicators are the same. You have may have a few data points where a higher than expected print is good. Below are the top economic indicators that forex traders should keep an eye out for. For many forex traders, fundamental analysis can be intimidating. For example, the gross domestic product GDP is always better when it is higher than what investors expect. It is also good for the GDP to be higher than the previous release. At the same time, there are a few economic indicators where a lower than expected headline print is good. An example of this can be the unemployment data. Lower the unemployment rate, the better it is for the respective currency. Trading decisions can be taken based on the outcome of the economic data. But you don’t need to be an economist to understand these figures when using fundamental analysis in forex. These economic indicators will eventually decide when the interest rate for currency will be higher or lower. 8 www.rockfortmarkets.com

Fundamental Analysis Gross domestic product GDP: The gross domestic product is a measure of the total value of goods and services provided in the economy. The GDP report is released on a monthly or quarterly period. This can change from one country to another. The GDP report can sometimes be released as a preliminary report. This is followed by at least two revisions to the initial data. Consumer price index or Inflation: The inflation or CPI data is directly linked to a central bank decision. Central banks can rein in inflation by raising interest rates. Likewise, to push inflation higher, the borrowing costs are cut. Interest rate decisions: A country’s central bank holds monetary policy meetings almost every month of the year. The central bank decides during such meetings whether interest rates should rise or fall or kept unchanged. The interest rate decisions taken by the central banks are determined by the aforementioned economic data. Speeches: Investors pay attention to speeches given by various heads of central banks. This can be via press conferences or speaking engagements. When a central bank’s governor or other policymakers talk, the markets listen. Investors try to assess the speeches to forecast what the next interest rate decision may be. Unemployment data: The unemployment data looks into the overall labor market in the economy. In a growing economy, lower unemployment rate goes hand in hand with higher GDP growth. The unemployment data is released on a monthly basis and also includes data on wage growth. 9 www.rockfortmarkets.com

Fundamental Analysis How does fundamental analysis help you as a trader? Many forex traders dismiss the importance of fundamental analysis in forex trading. This is partly due to the fact that not many traders can use this type of analysis. The forex market is all about interest rates. And we know how interest rates are set. Applying fundamental analysis can help you gain more confidence. You will also find more trading opportunities. Fundamental analysis can help you prepare towards having a better technical analysis outlook for the currency pair. But if you want to be successful as a trader in the forex market, then fundamental analysis is important. Fundamental analysis will give you the reason why a currency pair was behaving the way it did. Very often, this type of analysis will help you connect the dots as well. 10 www.rockfortmarkets.com

2 Technical Analysis What is technical analysis?

Technical Analysis Forex technical analysis is the study of price history to predict future prices Technical analysis is used not just in the forex market. It can be applied to any financial instrument that you want to trade. Technical analysis traces its origins to Charles Dow. Dow is considered to be the father of technical analysis after his famous Dow theory. Technical analysis combines different methods such as using indicators and observing historical price movements. Forex traders make use of indicators to determine what price was doing in the past. Based on this, they can determine how the price will behave when it approaches a previous price level. 12 There are many ways to bell a cat, and there are many ways to use technical analysis. The important point to note is that traders should have enough familiarity in using technical analysis in forex. Very often, traders use technical analysis in isolation. But when you combine this with fundamental analysis, it can be a www.rockfortmarkets.com

Technical Analysis What are technical indicators in forex? Technical indicators form the basis of technical analysis. These indicators are mathematically derived. There is validity in using technical indicators to predict various aspects such as trend, volatility, and price. Using a combination of technical indicators, forex traders are able to build a trading strategy. The trading strategy, which will you read about more is a set of rules. Depending on how price behaves in relation to the technical indicators, traders determine whether they can buy or sell a currency pair. While there are some standard forms of using these forex indicators, based on your imagination you can develop your own custom indicator if need be. 13 Using a combination of technical indicators, forex traders are able to build a trading strategy. www.rockfortmarkets.com

Technical Analysis How to use technical analysis in forex trading? You can use technical analysis in different ways. These can be classified into using an indicator-based approach, or simply a price-based approach. The picture below shows an example of a candlestick chart. You can see how some patterns keep occurring frequently. Depending on one of the two, the tools that one uses can shape the data. In a price-based approach, traders look at the price action. Price action is nothing but observing certain patterns that occur repeatedly in the market. There is an entire study dedicated to observing price action in the market. At the center of technical analysis is the price chart. The price chart makes use of a certain chart type called candlestick charts. These look like a candle and have wicks or tails at the top or bottom of the candle body. 14 Depending on whether the price closed higher or lower from its open, the candles are bullish or bearish. And during the course, depending on how high or low the price moved, the wicks are formed. www.rockfortmarkets.com

Technical Analysis The price chart simply shows the trader sentiment in the markets. Besides the candlestick charts, other commonly used chart types include: Bar chart Trend indicators Line chart The trend indicators, as the name suggests are a set of tools that helps a trader to determine the trends in the market. Area chart The most commonly used trend indicators are: Price only charts (Renko, Kagi, Point and Figure) Each of these chart types has its own pros and cons. You will learn about the types of forex charts in Part 3 Most important forex indicators in technical analysis While you are free to use any technical indicator to trade, there are some indicators that dominate the world of technical analysis. These indicators are also the most basic and have stood the test of time. 15 If you are just getting started with forex trading, then it is essential for you to understand these very basic yet standard indicators. Moving averages Parabolic Stop and Reverse (PSAR) Average Directional Movement Index (ADX) There are many more, which you will discover in course of time. Besides using the trend indicators, the price itself can be used to determine the trends in the markets. Oscillators Technical oscillators in trading, as the name suggests move between fixed values. These values can range from 0 - 100 or from -100 to 100 or any other combination. www.rockfortmarkets.com