There are numerous ways to analyze the Forex market in order to be profitable as a currency trader.
I find it very helpful to use Elliott wave theory in my market analysis. This does not mean that I base my entries solely based on Elliott Wave theory. No, this is only part of my overall strategy. My Forex trading system incorporates other tools and indicators in order to make entries.
Other possible ways to analyze the currency market may include: trend analysis, Forex news analysis, candlestick analysis, pattern analysis, technical analysis, and numerous others.
For me, it is important to get an overview and perspective of the Forex market as a whole – over multiple time frames. Even though I might trade time frames such as the 1 hour, 4 hour or daily, very often I refer to the weekly and monthly time frames to look at ‘the bigger picture’. I find that by doing so, I am much more familiar with the terrain and therefore I am more confident and experience less stress while trading.
I also do that because I want to align my trading with the over all direction of the market without being influenced by the market ‘noise’. That is only visible on the longer time frames. Knowing the over all direction of the market is extremely important information.
Having the information that I get by performing my market analysis allows me to plan my trades ahead of time no matter what my specific Forex trading system is. As a currency trader, I am much better equipped to trade the Forex market. I can search for specific and profitable opportunities on shorter time frames with much more confidence, knowing that I ‘trade with the trend’.
For example, if I know that the direction of the trend on the weekly time frame is short, it will be much more profitable for me to look for short trades on the 4 hour and daily time frame. In this case, any up movement will be corrective and probably less profitable.Also, by performing an in depth analysis, I consider different possibilities in advance and I know where I am likely to be wrong (and therefore set my s/l accordingly.
It is important to stress that analysis should only be a part of a complete trading strategy; analysis usually serves as a guide only. Entries should be based on specific trading rules.
In conclusion, by using prior analysis, a lot of the guess work is taken out. I know where it is more likely for the market to head to and I will look for short opportunities. That is very valuable information for any currency trader no matter which Forex trading system he uses.