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December 5, 2020

Understanding Data Analysis

What type of Data Analysis best suits your trading style?

The answer is simple: Any type that delivers a consistent degree of profitable trades.

Whereas analyzing stocks is necessarily focused on the health and condition of a particular company, fundamental analysis in the Forex market is focused more on the relative strength or weakness of a pair of currencies. In this type of analysis, the macro-economic indicators for an entire economy is going to be much more important to a trader’s decision-making process.

Macro indicators include such things as interest rates, GDP (gross domestic product) and even unemployment rates. Think of it this way; currency prices relative to other currencies are always ‘forward looking’ indicators. So for example, if a country is going through tough trading conditions. Their interest rates may be lower than their historical trend and their unemployment rate is increasing. These conditions may put downward pressure on the value of that currency compared to its peers. The currency exchange rate will reflect its perceived current and likely ‘future value’.

Some Forex traders will monitor economic news cycles (called fundamental analysis), as these announcements will sometimes cause sharp moves in cross-currency rates. The trader will try to be positioned in advance to take advantage of any potential moves. Predicting moves in currencies is difficult at the best of times, so traders often rely on Data Analysis tools to make their decision making process easier. Lets examine some of these other popular tools.

Watching Market Movements is one of the most common ways of gauging broad sentiment in a currency pair. This involves monitoring the number of traders investing in a particular currency. Let me say here that “following the crowd” is not necessarily the best way to form an opinion in Forex. As more traders follow and invest, then others notice and are also attracted in, creating a momentum in the price. The price is moved but without an underlying reason for the move. These movements usually start to unwind rapidly when enough traders start to sell out of their positions.

Technical Analysis is probably the most widely used tool as it involves charting the movement in the price of currencies over a given period of time. The theory in this type of analysis is that repeatable patterns of price movement in the past can be expected to repeat again in the future. This appears to be relatively predictable in circumstances where currencies remain in a stable range between one another. However, in circumstances where there is severe disruption either politically or economically (eg: Global Recessions; Wars) then technical analysis may be much less reliable as a predictor of price.

In recent years some traders have opted to use data supplied by a Signal Service Provider. These providers collect different types of data analysis from known experts (and from AI systems) and sell it to traders. The traders then interpret the signals in the data for patterns for placing profitable trades. The trade is still manually executed, as opposed to automatic trading performed by smart software / algorithms.

Another type of data analysis involves measuring the Volatility of a pair of currencies over a given period of time. Eg: Hourly, Daily, Weekly etc. The trader is looking for patterns such as reoccurring movements in price across a range of specific trading days and times. With this information the trader can workout the ‘probability’ of price moves in the future.

All serious Forex traders need some sort of data analysis to give confirmation to their trading decisions. Otherwise, trading becomes a random bet with lady Luck! The trick is to use just enough analysis to put the odds making a profitable trade in your favor. If you can do that consistently, then you will succeed. Remember, no one wins every trade. You only need to win slightly more then you lose to be getting ahead.

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