There are three types of analysis used for forecasting market movements
Fundamental analysis: This is an analysis of social, economic, and political factors affecting money supply and demand.
Technical analysis: This is a study of price and volume movement.
Sentiment Analysis: Apart from mini and micro analysis of data, this is the analysis of the mindsets and sentiments of traders and investors.
Fundamental Analysis and Technical Analysis (FA and TA) go hand-in-hand in guiding the Block Option trader through the way the market (prices) may go under the ever changing market conditions.
Fundamental Analysis on Block Option Trading
It is the analysis of economic and political information with the hope of predicting future currency price movements.
Fundamental analysis helps in forecasting future prices of various foreign currencies. Forecasting of prices is based on a number of key economic factors and indicators that determine the strength of a country’s economy. The factors may also include various geopolitical aspects that may impact the price movement of a currency pair.
This analysis is not used to get the specific numbers for the exchange rates of various currencies. Instead, it helps in determining the trend of the forex spot market over a certain period.
If the fundamental analysis hints at a positive outlook for a particular currency pair, it indicates that the price of that pair would experience an upward trajectory movement in the near future. A negative outlook indicates a declining price movement of currency pair in coming future. A neutral instance on currency pair indicates a flat (not much +ve or – ve side movement) movement in the near future.
Key factors influencing fundamental analysis
Let us now learn about the key factors that influence fundamental analysis. The factors are described below in brief −
The interest rates set by the central bank is one of the most important factors in deciding the price movement of currency pairs. A high interest rate increases the attractiveness of a country’s currency and also attracts forex investors towards buying.
A high GDP growth rate signifies an increase in the total wealth of the country. This points towards the strengthening of the country’s currency and its value rises relative to other foreign currencies.
A high industrial growth in any country signifies a robust country economy. A country with robust economy encourages forex traders to invest in country forex currency.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is directly proportional to the prices of goods and services in the country. If the CPI index is too high (above the central bank benchmark of CPI), there is a high probability that central bank is most likely to lower interest rates to bring down the rate of inflation and stabilize the growth rate for the country’s economy.
A country’s retail sales data gives an accurate picture of how people are spending (people income level) and the health of its economy at the lowest level. A strong retail sales figure shows that the domestic economy of a country is in strong shape; it points towards positive growth rates in the future.
Apart from these above points, the traders and investors also look into other factors of fundamental analysis like employment statistics, national debt levels, supply and demand balance, monetary policy, political situation, trade deficit, commodity prices, housing prices and capital market growth.
Technical analysis helps in the prediction of future market movements (that is, changing in currencies prices, volumes and open interests) based on the information obtained from the past.
There are different kinds of charts that help as tools for technical analysis. These charts represent the price movements of currencies over a certain period preceding exchange deals, as well as technical indicators. The technical indicators are obtained through mathematical processing of averaged and other characteristics of price movements.
Technical Analysis (TA) is based on the concept that a person can look at historical price movements (for example currency) and determine the current trading conditions and potential price movement.
Dow Theory for Technical Analysis
The fundamental principles of technical analysis are based on the Dow Theory with the following main assumptions
Price discounts everything
Price is a comprehensive reflection of all the market forces. At any point of time, all market information and forces are reflected in the currency price (“The Market knows everything”).
Prices usually move in the direction of the trend
Price movements are usually trend followers. There is a very common saying among traders – “Trend is your friend”.
Trends are classified as −
- Up trends (Bullish pattern)
- Down trends (Bearish pattern)
- Flat trends (sideways pattern)
Price movements are historically repetitive. This results in similar behavior of patterns on the charts.
Block Option traders and investors come with their own thoughts and opinions about the market. These thoughts and opinions depend on the position of traders and investors. This continues to help in general market sentiment regardless of what information is given.
Even if you (the retail trader) really believe that Dollar will increase in price, but everyone else (the big players) is discounting, you can’t do much about it (unless you’re a in large investment banks like – Goldman Sachs or some extremely wealthy individuals like Warren Buffet).
That’s the view of traders about how he feels about the market, whether it’s up or down. Depending on this, a trader decides to add a way to play market awareness about trading strategies.
What kind of analysis is better?
The Block Option transaction is all about trading on a strategy. Block Option trading strategy helps you better understand market movements and make appropriate moves. We have studied that there are three types of analytical methods.
- Technical analysis
- Basic analysis
- Emotional analysis
Each strategy holds the same importance and cannot be chosen. Many traders and investors prefer to use a unique analysis method to evaluate long-term investments or to obtain short-term profits. A combination of fundamental, technical and emotional analysis is most beneficial. Each analysis technique needs support from others to provide us with enough data about the Forex market.
These three strategies always go hand in hand to help you make good Forex trading ideas. All historical price action (for technical analysis) and economic data (for basic analysis) are available – all you have to do is put on your thinking cap (for analysis sentiment) and test the analytical skills.
To become a professional forex trader, you will need to know how to effectively use these three types of forex market analysis methods.
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