Understanding Forex Market Analysis

Alexandros Theophanopoulos
11 Min read

First things first, only two forces move the market - supply and demand. They are the common denominator for every economic, political, social, scientific, cosmic, and market event. Any market on the planet depends on them - and they are of utmost importance to the bulls and the bears, along with the open positions they hold.

In this article we will describe techniques, styles, approaches and strategies. Interestingly, they all have one particular thing in common - they all attempt to measure supply and demand. Some of them might even be highly accurate, but will almost always lag behind price. Some others, like economic theories used in fundamental Forex analysis, won't be very precise.

By changing their sentiment between being bulls or bears at different times, traders are able to create the very market they are trying to analyse, only to then change it again when they open a new trade. As a trader, you need to understand that only through the best Forex analysis of supply and demand can you gain a competitive edge over another trader.

Forex Technical Analysis: Technical Tools

The one defining feature of technical Forex market analysis is that it is chart bound. If you are looking at charts for any reason, you are exercising technical FX analysis. The logical basis for analysing charts is provided by Dow theory, authored by the infamous Charles Dow. Amongst other things, Dow claimed that the market discounts everything. Put simply, Dow was saying that whatever factor has an impact on supply and demand, will inevitably be reflected in the price - which is displayed in real-time on price charts.

In fact, pure technical analysis advocates against studying almost anything outside the price chart, because it's unquantified, unreliable data. This brief introduction to technical Forex analytics already highlights its biggest limitation - it analyses what has already been accounted by the market. The bigger question for traders to consider here is: how can I be competitive if what I know is common knowledge?

Are you interested in practicing your trading under real and live market conditions? If so, why not register for a free demo account and hone your skills before trading on the live markets! Click the banner below to get started:

Risk Free Demo Account

Register for a free online demo account and practise your trading strategy

Price Action

Price action is a subculture within technical analysis in Forex that has been increasingly popular since Forex trading became available to the masses. The reason for this spike in popularity is that price action, while concurring with the base postulate of Charles Dow's theory, deems most of the tools available to technical traders, such as classic technical indicators, as incapable of providing any competitive edge for the trader.

Price action traders draw conclusions from 'naked' charts, with price moves supporting their primary decisions in the creation of data. Everything else, if even considered, is there to support, but not to initiate trading action. In the foundations of price action trading lies an observation that the market often revisits price levels where it previously reversed or consolidated, because of the remnant supply or demand that is still there.

What is remnant supply and demand?

Instead of chasing the market, institutional traders from banks, hedge funds and multinationals only care for their orders being filled at the price they wanted. Their Forex analysis is aimed at where the market is going to be next month, or even next year. If the market moves away from a level that they traded today, their orders will not get cancelled. They hold their positions open until the market returns.

These remaining open orders warp the fabric of the market, attracting the price to revisit. This is similar to how mass warps the fabric of time and space, attracting more mass. Price action strategies are most often used in daily Forex analysis.


Charts are a series of price quotes represented graphically. They provide the recorded history of the market. On the '0Y' axis we have price, on the '0X' axis we have time. What is displayed on the field - is the price action itself. No matter which trading style a person chooses - long-term positional or short-term intraday - everything starts with charting.

Charting itself is a relatively new technique to the western world. Wall Street has only been using charts for a little more than a century, although in the Far East there are documents containing price quotes in the form of candlesticks dating as far back as 300 years. These are known as 'rice price quotes'.

Candlesticks are the most basic tool available to a technical trader. Using bare candlestick patterns to forecast price movements is a strategy in-of-itself.

In addition to learning common patterns, it is best to understand the underlying supply and demand forces that shape them. Aside from studying bare candlesticks, technical traders may also use charting patterns. The most popular being support and resistance lines, trend channels, triangles, and flags. There are many others too. It is important to understand that supporting constructions are not there to predict future market movements.

They are only there for the convenience of a trader, and their better understanding of past moves. The same chart may appear to consist of a variety of patterns to different traders, or perhaps even the same trader at different times, producing opposing signals. This is why supporting constructions should not be the primary argument in your decision making, and perhaps why supply and demand should.

Technical Indicators

If you have opened your trading platform, you will have definitely seen a technical indicator before. For clarity, let's divide them into two big groups - trend indicators and oscillators.

Trend indicators work well in trending markets, whereas oscillators work well in ranging markets. At least they do in theory. There are a couple more that are in between, such as Bollinger Bands. They use both a variation of an MA to track the trend, as well as the price range channel to hint on the turnarounds.

Finally, there are volume based indicators. These are interesting because although trading volume has always been used in financial trading as a defining factor for supply and demand, accurately measuring it within a Forex spot market is impossible. This is because Forex spot is an OTC (over-the-counter) market.

Technical indicators are, for lack of a better word, imperfect. They lag behind the price, often being redrawn upon the candle closing. They are used regularly in combinations to complement each other, because otherwise they fail completely. And when you hear professional traders advising beginner traders to keep their charts clean and simple - they are talking about not abusing the technicals. Lastly, trading strategies that are based purely on technical indicators can hardly provide a competitive edge.

Already trading on the world's most premiere multi asset platform? If not, click the banner below and join countless of traders now! 

The World's Premier Multi Asset Platform

Forex Fundamental Analysis: Fundamental Tools

Fundamental FX market analysis does not use price charts, but rather economic data such as interest rates, inflation rates, or trade balance ratios. The theory behind fundamental analysis is that markets may misprice a financial instrument in the short run, yet always come to the 'correct' price eventually. For the period of this 'mispricing', a trading opportunity is subsequently created.

Fundamental FX trading analysis is hardly a style that provides precise points for entering or exiting trades. However, if used knowledgeably, it is a great tool to predict long-term price movements. The catch with purely economic based fundamentals is that even though countries are much like companies, currencies are not quite like stocks.

A company's financial health is directly relevant to its stock price. For countries however, an improving economic performance does not necessarily equal growth in its currency's relative value. In fact, a currency's relative value is a function of many factors ranging from national monetary policies, to economic indicators, to the world's technological advancements, to international developments, or even natural disasters.

Economic Theories and Raw Data

Besides the market sentiment, there are also a few economic theories that work on locating disparities in the current price of a currency and its 'true' value. Here are a few examples:

  • Purchase Power Parity (PPP) - assumes that goods should cost the same after the currency rate adjustment. If they don't, good trading opportunities present themselves.
  • Interest Rate Parity (IRP) - basically the same as PPP, except that goods are financial assets in this case, and their purchase in different countries should yield the same after the interest rate adjustment.
  • Balance Payment Theory (BPT) - deals with a country's trade balance. If more goods and services are imported than exported, the national currency will depreciate.
  • Real Interest Rate Definition Model (RIRDM) - exactly the same as IRP. A currency with higher interest rates will appreciate against the currency with lower rates, through being a more attractive investment.
  • Asset Market Model (AMM) - much like the trading balance, except that measures inflow and outflow of foreign investment. The more foreign investment, the higher the national currency appreciates.

Aside from the aforementioned theories, raw national economic data has a say in Forex weekly analysis. Employment data, interest rates, inflation, GDP (Gross Domestic Product), trade balance, retail sales, durable goods and other indicators all can have a short term effect on the market upon their publication. If you would like to track this sort of data, you can do so with our Forex calendar.

Sentiment-Based Approach

This is possibly the most straightforward method of measuring supply and demand other than through price action, although it is not without its limitations. The method is based on measuring open interest (open trades), which is the key to supply and demand. It's an idea borrowed from the stock market: wherein, if trade volumes are rising, while open interest is dropping, the chances are that market sentiment is changing.

The Forex spot market is traded over-the-counter, so tracking trading volume, or measuring open interest is impossible. The next best thing to help traders gauge market sentiment is the 'Commitment of Traders' report for the Forex futures market. There are only two problems associated with this:

  • First of all, Forex futures' daily volume is only $100 billion, compared to the Forex spot market, which is worth $1.5 trillion.
  • Secondly, among the most successful traders, there aren't only speculators, there are also hedgers, who trade in a completely different, and opposing way. For instance, if speculators buy harder with the stronger bullish trend, speculators sell harder with the stronger bullish trend.

Most traders tend to use strategies that work for them, whether it be technical analysis, fundamental analysis, or a mixture between the two. Undoubtedly, interest rates, inflation rates, trade balances, market sentiments and other fundamentals can show traders the bigger picture. However, in the short term, currencies rarely move in a straight line, which means that there is plenty of short-term price action to take advantage of. In that domain, technical analysis can be very effective.

Whatever type of analysis you use, make an effort to trace its logic back to supply and demand market theory. If it still makes sense, go for it. If it doesn't, think about it some more.

Looking to always stay up to date? Why not tune in to one of our free webinars, where you can gain new insights and strategies with our in house trading experts! Click the banner below for more:

Advanced Trading Webinars

Discover the latest trading trends, learn different strategies and get access to advanced trading tools.

Other similar articles you may find interesting:


The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admirals investment firms operating under the Admirals trademark (hereinafter “Admirals”) Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admirals shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
  3. With view to protecting the interests of our clients and the objectivity of the Analysis, Admirals has established relevant internal procedures for prevention and management of conflicts of interest.
  4. The Analysis is prepared by an independent analyst based on their personal estimations.
  5. Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admirals does not guarantee the accuracy or completeness of any information contained within the Analysis.
  6. Any kind of past or modeled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admirals for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  7. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.


Forex Fundamental Analysis: An Introduction
The art of Forex fundamental analysis is both intricate and crucial to understanding the true valuation of any investment or trading vehicle, in this case currency pairs. Fundamental analysis is a method of analysing the financial markets with the purpose of price forecasting.Forex fundamental analy...
How to Trade the Japanese Yen (JPY)
The most popular Asian currency is definitely the Japanese Yen. According to the latest report of the Bank for International Payments for the forex market, the Japanese currency remains the third most traded currency in the world; it contributes to 17% of foreign exchange transactions. If you want...
How to Trade the GBPCHF Currency Pair
The UK and Switzerland are important trading partners. Bilateral trade is worth over £31.7 billion a year. In fact, the UK is the fifth most important destination for Swiss investments.The intertwined economies influence the price and movement of the British pound vs Swiss Franc (GBPCHF) currency pa...
View All