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Getting to Grips with Analyzing Forex Markets. A key ingredient for operations within the foreign exchange market


The forex markets are challenging for even the most business minded people. That is why it is important to have a grasp of the techniques for expert analysis in this area in order to ensure that you can operate effectively and hopefully obtain some level of profitability within the forex industry. Although the trader may not be called upon to make an expert analysis of the industry, the mere fact that they are able to understand the key features of the market ensures that they will know where and how to obtain support for their business sector. This article is meant to provide an overview of the salient points that drive the forex market.


To begin with there is a distinction between the operators who simply deal with the news and those who deal with the indicators or patterns within the forex industry. The traders who are mainly concerned with news are known as fundamental traders within the niche circle that forms the forex sector. Their counterparts who concentrate on indicators and patterns of the forex industry are known as technical traders. The distinction will make sense to the people who work in the forex industry but may not make as much impact on the ordinary person on the street. Traders are free to designate themselves as one or the other. Some might even choose to have a dual purpose within the forex industry. Each section will have an area of expertise and the conventions that govern it.



Some technical terms


There is a technical term that is used to describe trading patterns within the forex industry. It is known as the candlestick patterns theory. This can be seen on any streaming forex charts. In particular the traders will be concerned about reversal pattern shifts as well as those indicators that show a continuation. The knowledge does not just stop at awareness but also includes the application principle whereby traders are expected to study the data and come up with patterns that facilitate the decision making process within the forex sector. Knowing these patterns and what they mean will greatly assist any trader that hopes to design and implement a bespoke trading plan.


By internal convention, traders are expected to select a trading style that fits within the industry that they are working in and also deals with their own unique solutions. Initially you will be introduced to two basic styles. The first is called the forex scalper which essentially means you are a “love them and leave them” sort of trader. The forex scalper finishes all their transactions within a matter of minutes and exits the situation before there are any drastic changes in the forex movements. Position traders on the other hand will take a few days or weeks to study the trends and then make a commitment in terms of their purchase patterns. They are the “long term engagement” type of traders. The type of style that you choose will ultimately decide your conduct within the industry. It also enables outsiders to classify your services depending on what their own requirements are.

Dow Theory is based on the analysis of the early history rates of the New York Stock Exchange, where it has been already noticed a clear trend towards the simultaneous increase or decrease in the vast majority of the shares. It was noted that most of the courses is bound to the general public in the overall market trend.

Dow theory is based on the assumption that changes in quoted shares are most consistent with the general trends in the stock market. During the bull market, prices of the most shares are increasing, but when there is a bear market – shares mostly lose their values and it is a signal – signal to sell or to buy.

Dow distinguished several types of trends because of their duration:
- Primary trend (base) – usually takes several years;
- Major trend, also known as the primary or long-term trend – takes at least a year or more years (on average 2 to 4 years);
- Secondary trend, also known as medium-term trend – it usually lasts from one to several months.  Secondary trends are subordinated to the original trend;
- Minor trend, also called tertiary or short-term trend – it takes several days to several weeks and it is the part of secondary trend. And in short term it can be signal to buy or to sell.

Dow took a further analysis of the relationship between the trend of the market volume and the trend level of quotation indexes. The Dow theory states that during the bull maket the growth of rates is accompanied by increasing the trading volume and price reductions decreases the volume. In the interim of technical correction, despite the depreciation of prices, a simultaneous decrease in volume is a clear predictor of the overall rising trend, which will soon have the chance to go from the “shadow zone” to light.


Analogicly – in the bear market – there is an inverse relationship. During the main recede trend, we have to deal with the increase, which is accompanied by decreases in quotes. By contrast, sales volume decreases when listing the technical correction grow to the top. According to Dow it is a symptom of a general bear market, because the observed increase in the priceusually turns out to be very volatile.


Dow Theory was mainly first used to identify the trends of the market crisis on the American Stock Exchange NYSE. Dow used the stock exchange indexes (DJIA and the DJTA).


Dow Theory has no practical applications for determining the point of buying or selling currency pairs on the Forex market. However, this theory makes sense, because the knowledge of the main assumptions of this theory enables us to understand the other well-known theories and systems to determine the turning points in courses such as Elliott wave theory, or simply then it will be easier to learn the trend analysis, analysis of the formation and help to determine entry and exit points to the forex market.

Technical analysis is an essential tool for determining the positions of opening and closing. Forex has a strong, clear trends of changes in prices, where the technical analysis can be used. This means that with its help can be quite likely find the changes of the trend.


In addition, due to the specifics of currencies, the investor opens and closes positions many times during the day. Playing at such short lengths of time, technical analysis seems to be practically the only effective tool that allows to obtain a good results.


Remember anyway that the rules of technical analysis are not infallible laws of science. Technical analysis is more art than science. On the other hand, technical analysis, however, is based on many years experience in all financial and capital markets. Certainly its use can achieve much higher average return than investing only based on intuition.


In practice, the biggest problem is not the failure of technical analysis, but the lack of consequence and disregard of signals flowing from it by investors. Ignoring the basic principles of technical analysis is the most exposure to loss or at best to reduced profits.


Technical analysts use data from the past. Rate of turnover and volume are only necessary information. These data is regarded as the full information, which means that technical analysis is the internal assumption that everything what has an impact on the market is reflected in rates and volume.


The level of quotation and sales responds to any response of investors, including psychological, that particularly in the short horizon of investment are important. Therefore, the superiority of technical analysis over fundamental manifests mainly in the short term.


Basic principles of the technical analysis can also include three statements:
- Rate movements are a consequence of fluctuations in supply and demand on the market,
- It is possible to determine the direction of the change (trend), which always takes a long time,
- Fluctuations in the price level are arranged in a certain, repeated and a regular cycle.


On the Forex market, the chart is a visualization of the market situation of the currency. On any trading platform you can find a service dedicated to the graphs, so it is possible towatch the current market situation and react appropriately.

According to the Dow – the end of bull market is also beginning of a bear market and a major downward trend is divided, like the bull market, also in three phases. The first period is known as distribution phase. This is the final phase of speculation of the smaller investors. Long-term investors begin to sell a choosen currency, whose exchange rate is highly inflated. Demand is gradually decreasing, and supply is increasing.


This all means that the panic on the market started as the next phase of the bear market. The largest investors have already sold their shares, and yet do not intend to re-enter to the market. A major demand from their part dies, and small investors are starting to get rid of the currency. Demand, however, does not allow them to achieve their original goals, so the discount rate becomes accelerated. Sometimes at this stage beginsa panic with sales at every, even very low, price.


After the panic phase there is often short-lived boom. But this is not the end of bear market, rather the pause between second and third wave of the bear market. Investors saw the weakness of grow withdraw their funds from the market by agreeing to only a slightly reduced losses compared to the bottom of the listing phase during panic.


In the third stage of the bear market, the main source of supply are those who purchased a choosen currency at a temporary boom, hoping that the boom is coming here again. Exchange rate begins to decrease again. Rate decreases, until finally all the bad news will be discounted. Then again can start a new boom. Cycle of a stock according to Dow closes at this point.

Let’s think if the Dow theory aplies to the Forex market where people trade money instead of the stock shares.


The main assumptions of Dow Theory are universal for all markets, where there is a meeting of supply and demand and where the odds of exchanged shares, commodities or currencies will affect the psychological orientation of individual market participants. So regarding the forex market in the light of the Dow theory we can find three phases defined by Dow.


The first stage is defined as the accumulation. At a time when the former takes the fall of the currency, it moves slowly into the hands of “tough guys”. Forward-looking investors watching the economic crisis causing the weakening of the currency exchange rate find that in this matter it can be only better. Usually after the crisis there are coming a better times and as a result of improving the fundamental phenomena for a country – the currency exchange rate can begin to grow. In the top of depression and hopelessness, they proceed to buying at the lowest prices. As a result of their work the rate stops in place.


The next phase of the bull market is a consistent increase in prices. Usually, however, it is still calm and balanced. Indeed, potential investors become convinced to enter the market. In the economy of the country there is more information that promotes growth of the currency.


Last stage is called bullish phase of activity of smaller investors. In fact the small investors begin to speculate on a wider scale with less knowledge about the market. Mood of gold fever comes and demand is growing dramatically.