Successful forex trading is the art of being able to predict when currencies are going to shift in value in relation to each other, and what direction that shift is going to be in. The good news is that those fundamentals are relatively simple; is the dollar going to weaken against the yen? Will the pound pick up against the euro? Another piece of good news is that there are huge swathes of data available to the average retail trader to enable them to make these decisions. Of course, you may opt to rely on your instincts and make decisions as the situation in the various currency exchanges unfolds before you.

While there is a place for this kind of fast thinking and quick decision making in forex trading, it will only ever form the basis of a stable and successful long term strategy – one which delivers consistent levels of profit – if the quick decisions are built upon the foundations of a clear and thought through long term plan. And this kind of planning is only possible if you know exactly what kind of data to be on the lookout for, and about the tools which are available aid in your analysis. 

The complexities of big data in the age of seamless digital communication are such that it would be impossible to summarise every possible metric or analytical approach accessible to the retail trader in the space available. What is possible, however, is an overview of the main planks of data analysis a trader needs to bear in mind, and a look at a few of the types of tool which can make that analysis easier and more accurate.             

Forex Fundamentals 

When a trader buys and sells shares the analysis required is focused, in the main, on the good health of otherwise of the company in question, and whether the various indicators predict that the shares are likely to rise or fall in value. Wider market conditions have an impact as well, of course, but these conditions would be the same for any stock being traded, which places the emphasis firmly on the choice of stock.

Where forex trading is concerned, however, the fundamental issue is always going to be the relative strength and weakness of a pair of currencies. Looking ahead in an effort to take advantage of shifts in value means analysing macro-economic figures such as interest rates, unemployment rates and GDP (gross domestic product). Many of these figures are firmly fixed in the economic news cycle, meaning it’s simple for a trader to see in advance when a country or bloc such as the EU is likely to announce figures which might impact on currency fluctuations (predicting what this impact will be is a more complex matter altogether, of course).

Requiring more vigilance to spot, on the other hand, are the sudden shifts which might be triggered by an event such as a comment in a ministerial press conference which is assumed to increase the chances of a no-deal Brexit and so sends the value of the pound dropping. Fundamental analysis based on one-off events of this kind requires a close attention to detail, up to the minute (or even second) access to newsfeeds and the willingness to take up positions instantly.        

Technical

Technical analysis is based not on real world events beyond the confines of the currency exchanges, but on in-depth analysis of the way in which the price of currencies has moved in the past. By focusing on charts of price movements and analysing them with a variety of tools – both manual and automatic – a trader can identify patterns which have repeated in the past and can be expected to repeat again in the future. Past performance is no guarantee of future success, of course (some clichés become clichés because they happen to be true), but the relative stability of the major currencies, over the long term, means that patterns of movement can become relatively predictable. 

Market Movements

A further method of analyzing the forex markets is by watching out for larger than usual shifts in the number of traders investing in a particular currency. As soon as a large number of traders invest in a particular currency, the future pool of people who might opt to sell that currency expands, with the result that the potential value of that currency is impacted upon. Analyzing market movements could be referred to as depending upon the wisdom of crowds. As has been shown in the past, that wisdom can often be mistaken. A stampede to buy or sell a specific currency could be triggered by knowledge of where the value of that currency is heading, but it could also be caused by a simple self-fulfilling prophecy – sometimes, if enough traders take a position, enough other traders assume there must be a good reason for doing so and follow suit, creating a pattern which feeds off itself with little or no external justification.     

It’s not a question of which of these three modes of analysis is the most effective, since the best results will always be gained by combining elements of all three. The deluge of data which is available, however, particularly where technical analysis is concerned, means that the wiser trader will make use of some of the tools which are available:

Session highlighter

One of the key attractions of forex trading is the fact that the currency markets are open somewhere in the world 24 hours a day throughout the week. The fact that different markets are open at different times of the day means that the sessions within those markets are likely to have different impacts on the pairs of currencies which a trader is working with. A session highlighter tool can be used to divide a traders charts into these various sessions, and then to highlight any movement that occurs over set periods, such as a minute, a specific number of minutes or an hour.     

Volatility Tool for Forex 

A volatility tool will show a trader how much, and in what way, a pair of currencies has moved on an hourly basis during a period such as the last thirty days. This enables the trader to build up a fuller picture of the way the currency pair behaves, and note any patterns such as recurring movements on specific days or at a specific time of the day. The more advanced versions of the tool will calculate the typical movement range and, given a time period by the trader, will display a percentage probability that the pair will stay within the set range.   

Signal service

Signal service providers offer instant information in the form of tips, delivered either by experts or AI systems, which recommend trades are made at a certain time and price on the basis of analysis. There are different types of signal services available, some based on fundamental analysis (i.e. news which might impact on the markets) and some on technical analysis. Signals shouldn’t be confused with the kind of AI that trades automatically on your behalf – they are merely providing information in a timely manner which it is up to you, as a trader, to interpret.  

Undertaking and applying analysis is a key practice of any successful trader. The degree of analysis a trader carries out will depend upon their inclination and appetite for hard number crunching, but the rule to remember is that while there really isn’t such a thing as too much analysis (as long as it’s used to eventually take a position), the concept of too little analysis is all too real.