Let’s go technical: Technical analysis is a routine of analyzing a financial asset’s historical prices and other statistics generated by market activities, to define the future prices.
Traders who have been active in the stock market and foreign exchange, for many years, have found that one compelling and useful way to forecast the future movements in assets prices is to analyze their behavior in past changes. This approach is often called technical analysis, which dates back to the late 1800s. It had gained the importance that it has today since the 1990s when computer models and advanced charting techniques came into light.
Currencies tend to develop strong trends. A large volume is manipulative, resulting in a market that frequently overshoots and corrects itself. A technically trained trader can quickly identify new trends and breakouts that could provide multiple opportunities to enter and exit positions.
Technical Analysis with Charts
The Bar Chart
The price movement is shown by a bar in a bar chart. How long is this bar is determined by the high and low of a trading period, for example, a hour.
The Candlestick Chart
A Candlestick chart gives a beautiful picture of the profile of market prices and makes it easy to categorize market price patterns to a more excellent degree.
Trend Lines and Chart Patterns
Trend lines are lines drawn that connect either a series of highs or lows in a trend. They are used to track the trend in progress.
Support and Resistance Levels
Support and resistance levels are one of the most basic and an essential component of technical analysis that signal tops and bottoms.
Trend Analysis and Timing
Markets don’t move straight up and down. The direction of any market at any time is either Bullish (up), Bearish (down) or Neutral (sideways). Within these trends, markets have countertrend (backing & filling) movements.
Defining prices based on future earnings – it focuses predominantly on factors such as the overall state of the economy, interest rates, production, earnings, and management”.
Fundamental analysis is a procedure of evaluating an asset; it attempts to measure its intrinsic value by examining the underlying forces that could affect the asset.
Supply and Demand
What causes changes in the price of commodities, stocks, bonds, and currencies can be attributed to Supply and Demand. The theory of supply and demand is the most fundamental economic principle that drives prices and explains consumer behaviors.
In times of weather disaster, war, crisis investors would usually focus a safe- haven currency, which has traditionally been the US Dollar. In recent times, it has lost its safe-haven status and has been replaced by Gold and the Swiss Franc.
Market Expectations - "Buy the rumour, sell the fact"
It is concluded that prices tend to move primarily on expectations of certain events, economic data and political news instead of current data or news being released.
Economic ups and downs are considered to be the main reasons for determining exchange rates in the financial markets. Economists take data from several providers and compare them with economic reports published by governments on a weekly or monthly basis. This data is after that analyzed, and traders base their trading moves on the forecasts derived from the economic data.
Interest rates are said to be the single most important economic reason which determines exchange rates. The interest rate can be defined as the price paid for the use of money. Traditionally interest rate hikes in a country will lead to the strengthening of its currency as investors shift assets to gain a higher return.