What is Forex analysis?
Forex analysis refers to the act of assessing the changes in currency pair prices and the factors which impact the price changes. This form of analysis is widely used by forex traders who purchase and sell various currencies for profit. Fundamental and technical analysis are the two leading ways that traders use for forex trading. Today, an increasing number of traders are opting for a combination of both techniques. Know more about best brokers in forex
How does it work?
Retail traders as well as financial firms actively take up forex analysis to be able to gain profit from what is the largest financial market in the world. The forex market remains functional for 24 hours a day, five days a week. A major part of the activity takes place in the international trading hubs based in London, New York, and Tokyo.
Contrary to the stock market, where investors could buy shares of different firms, currencies are always traded in pairs of two. When you buy a currency, you automatically sell another to complete a transaction.
Forex analysis refers to the practice of establishing which currency out of the two in a forex pair would emerge as the stronger one over a certain time period. Forex traders could make use of this information to buy those currencies that are likely to increase in value or sell the ones where the prices are expected to fall. To be able to accurately predict this, forex traders would resort to analyzing a number of different sources. They will be inclusive of fundamental factors, like the economic conditions of a country, the rates of certain commodities like oil, or any major news updates that impact international economics. Technical factors must also be taken into account like the recent price history of the currency with respect to its historical averages.
Forex Analysis With Parallel and Inverse Analysis
Parallel and inverse analysis refers to the study of the way individual currencies can impact the movements of currency pairs. It also assesses their intra-day movement cycles or the movement that takes place within the context of a trend. It is also known by many names like currency correlations, individual currency analysis, and currency strength and weakness. Forex traders’ success can be exponential if they can ace these concepts.
Forex analysis along with parallel and inverse analysis pairs could be understood in a couple of weeks even if you’re just getting started in the forex market.
- Understanding parallel & inverse analysis
It has been observed in general that every time the US dollar weakens, the price of oil increases. Hence, when the dollar weakens, more US dollars can be converted into currencies to purchase the same amount of oil. But one should also note that expensive oil would also indicate that the Canadian dollar could become stronger given the link between the oil rates and the Canadian dollar.
Currency depreciation happens every time a currency becomes weaker in value against other currencies. Simplified monetary policy along with inflation could lead to currency depreciation. Reserve assets refer to financial assets that are denominated in foreign currencies and held by central banks that are largely used to balance payments. Foreign exchange speculators work with a funding currency, which can be borrowed at a nominal interest rate to purchase a high-yielding asset.
- Analyzing major currency pairs
In this article, we will walk you through the eight most widely traded individual currencies of the forex market. These are the USD US Dollar, CHF Swiss Franc, EUR Euro, GBP British Pound, JPY Japanese Yen, CAD Canadian Dollar, AUD Australian Dollar, and NZD New Zealand Dollar.
Note that a currency pair includes two separate currencies will help you gain insight to accurately conduct market analysis so there are more pips in your direction. In this piece, we will look at eight currencies and a total of 28 pairs with the parallel and inverse methods.
Parallel and Inverse Pair Grouping Examples
Here are three examples of parallel or inverse groups of currency pairs:
EUR/USD USD/JPY NZD/USD
EUR/JPY EUR/JPY NZD/JPY
EUR/CHF CHF/JPY NZD/CAD
EUR/GBP GBP/JPY NZD/CHF
EUR/CAD CAD/JPY AUD/NZD
EUR/NZD NZD/JPY EUR/NZD
EUR/AUD AUD/JPY GBP/NZD
In the first set of forex pairs on the left, the common currency is the EUR (Euro) which is the base currency. When the Euro becomes stronger, all the pairs on the left would also move up.
In the second group of pairs, we have the JPY pairs. However, as JPY is the quote currency, if it strengthens, the value of all the pairs will drop.
Now if we analyze the third group of currency pairs, the NZD pairs, NZD will become stronger in two scenarios. When the four pairs on top would increase and when the three at the bottom decline.
Now it may throw off some traders in the beginning who may be used to standard technical indicators, but for some this could be a Eureka! moment. It may hit them that they were missing out on a major aspect in their forex trading strategy. The same logic used above needs to be applied to eight currencies and 28 pairs total.
Currency’s individual strengths and weaknesses
A majority of forex traders use technical indicators to assess currency pairs, but as soon as they become aware of the individual currency strength or weakness concepts, they let go of the indicators for good. For instance, if we revisit the EUR/USD again to purchase, say the EUR/USD will strengthen as a pair when the EUR as an individual currency increases in value or when the USD as an individual currency weakens, or when both happen together.
When you buy the EUR/USD, it indicates that you are purchasing the left (base) currency by selling the same amount of the right (quote) currency. For instance, when you buy EUR/USD, it essentially implies that you will buy Euros by exchanging US dollars of the same value. Technical indicators are not concerned about individual currency strengths or weaknesses. To be able to conduct a good market analysis, you should be using both technical as well as fundamental indicators in your strategy.