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Forex Analysis - Turning Data Into Dollars

May 6, 2008
When you analyze Forex, you want to try and predict which way the market is going to move. If your predictions are right, you'll profit, but if you aren't right, you'll lose your money. You can do a Forex analysis in two ways. One is technical analysis and the other is fundamental analysis.

Technical analysis means that you examine currency prices over a period of time so that you can try and tell what trends and patterns there are. As an example, let's say that the value of one currency has been steadily growing over several weeks. It's likely that this trend is going to continue into the future at least for the short term. When you are doing technical analysis, identifying a trend is the most important aspect of this. If you can correctly identify a trend and then trade so that you dovetail with that trend, your trades are likely to be profitable. In addition, the earlier you identify a trend, the more likely you are to have profitable trades.

Fundamental analysis means that you take into account the economic social and political forces influencing the value of a particular currency within a given country. If the country's economy is strong, and if the country has a stable government, the country's currency is likely to be valuable and will likely rise against the currencies out countries whose economies are weaker.

Currently, as of early 2008, Zimbabwe is a country with a very weak economy. This is largely due to a very unstable and corrupt government. Currently, farmland is being stolen and currency reserves plundered by Zimbabwe's corrupt government officials. Inaddition, Zimbabwe's inflation is now over 1000%. This means that the currency loses more than 90% of its value every year. At present, Zimbabwe's currency is literally worth less than the paper it is printed on.

Even in countries that have stable and healthy economies, however, a particular reserve bank's actions (such as the Bank of England in the UK or the Federal Reserve in the US) can influence a country's currency value.

For best results, you need to use both technical analysis and fundamental analysis when you trade in Forex.

As an example, let's say the chart the value of the UK pound (GBP) against the US dollar during October through November 2007, and you just use technical analysis. You would have noticed that for several consecutive days, Pounds Sterling was going up against the US dollar buy a round 100 pigs every day. On November 8, 2007, you see that the Forex quote is GBP/USD = 2.1104/2.1109. Your instincts tell you that by the end of the trading day, this should have gone up to about: GBP/USD = 2.1204/2.1209. You decide to buy one standard lot at a rate of 1 GBP = 2.1109 USD, = 47373 GBP. As before, you expect the GBP to go up by 100 pips; this will mean that you can sell your 47373 GBP for 2.1204 USD each, which gives you $100,450, or a $450 profit for the days trade.

However, when you check the day's trading a few hours later, you see that it has moved against you, so that the Forex quote is now 2.0906/2.0911. You decide to get out so that you can cut your losses; you sell your 47373 GBP for 2.0906 USD each = $99,294. Now, instead of making $450, you have lost $706. What has happened here? On the first Thursday of every month, the Bank of England sets the UK base interest rate.

So, on Thursday, November 8, 2007, the Bank of England was to increase the UK base interest rate. This meant that UK inflation rates were lower so that the value of Pounds Sterling went up.

However, what the Bank of England did instead was to leave the UK interest rate on hold. This caused the GBP to fall in value instead of rising as expected.
About the Author
Ian Armstrong is an avid Forex enthusiast.

Some of the most popular trading systems have been objectively reviewed - based on actual performance - at Forex Trading Software
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