Traders analyze Forex market in order to make a forecast that will enable to increase the profitability of transactions. Forecast is the part of a trading plan. Different methods of analysis are used to define long-term trends, favorable conditions for opening and closing of deals, prospect price rebounds etc.

As a rule, there are two main methods of analysis on Forex:

• fundamental analysis
• technical analysis

Fundamental analysis is based on the investigation of different economic indicators as interest rates, inflation, business activity indices, employment, GDP. The instruments of the fundamental analysis include news, directly or indirectly connected with world financial markets, economic calendar, various statistical reports, statements of main politicians and even rumors.

Traders that follow this type of analysis must know how to separate the key aspects from secondary ones and find cause-and-effect relations between events. To make the proper use of the fundamental analysis one should be aware of the global economy and financial markets, knowing what factors and what information may affect the price of currencies and securities.

The technical analysis is based on the historical data of prices. The study of previous price changes enables to forecast the future situation. The instruments of the technical analysis are price charts, technical indicators and trade advisors. This type of analysis allows to define trends, support and resistance levels etc.

There are several types of price charts: linear, candlestick, bar. It is possible to place various indicators on charts. Most of them are integrated in trade terminal. Indicators are mainly subdivided into two groups –trend indicators and oscillatory indicators. Trend indicators define the current price tendency, oscillatory ones work better while the sideways movement indicating the oversold and the overbought market.

Also trading advisors enable to automate the trading process partially or completely. These are certain programs aimed at performing operations on Forex without trader’s participation, i.e. that advisors (robots or experts) can make deals basing on the received signals automatically.

To compile the trading forecast many traders combine different types of analysis. It is crucial to keep in mind that the forecast is just the forecast: it may not be justified. Even professional analysts sometimes make mistakes in their analysis as Forex market is not stable. The usage of various methods of analysis is crucial for successful work, but the main task of a trader is to trade in accordance with the market and respond quickly on any changes.

Added by Alexandr Kornilov,
InstaForex Clients’ relationship manager