Fundamental Analysis, Technical Analysis and Speculators
Banks, governments, businesses and retail customers all trade currencies to satisfy their various needs. Governments do so to protect their country’s international reserves from currency fluctuations, so too do businesses that have international interests. On the other hand, banks may hold currency positions to settle transactions on behalf of their clients and in some cases may have a currency trading desks that has the sole objective of making a profit from the forex market.
However, currency speculators, retail and commercial customers can only cause large exchange rate moves in liquid markets if they trade large amounts, either individually or collectively. Even so, it is possible to move the market with low trade volumes if the market is illiquid (there aren’t many players in the market). In any case, it is important to remember that low volumes in the $3 trillion a day forex market can still be huge.
Many market players make trading decisions based on fundamental analysis. For example, high inflation often suggests that the central bank may need to raise interest rates to cool or temper inflation. Higher interest rates on a particular currency will generally make it more attractive to investors, who can realize higher returns from holding positions in higher yielding currency pairs. This is more so the case when inflation is spurred by positive economic activity as opposed to bad economic management.
Because the release of economic data is generally scheduled, it is possible to know exactly when the market will move based on when new economic data will be released. All the trader is left to do is figure out in what direction to place the trade. You can find a schedule of economic releases by using and economic calendar. If you use a good economic calendar it should tell what news releases have a high, medium or low chance of moving the market. Some economic releases to pay attention to include:
- Interest rate decisions
- Foreign purchases of U.S. Treasuries (TIC data)
- Trade balance
- Current account
- Durable goods
- Retail sales
- Inflation (consumer price index)
- Gross domestic product
On the other side of the equation, trading decisions are often made based on technical analysis. In essence, trades are taken based on whether trading charts suggest that a currency pair is going to fall or rise. Technical analysis may look at such things as candlestick patterns and support and resistance levels of a 100 periods moving average line. There are also scores of technical indicators that are used by traders; the more traders there are that use these indicators, the greater the chance that they will influence price movements when certain values are hit. Some popular technical indicators include the RSI, Fibonacci tool and CCI indicators.