There are three basic types of forex trading analysis:
- Technical Analysis
- Fundamental Analysis
- Risk Sentiment Analysis
Beginner traders often ask about the best types of market analysis, in fact you should know all three.
It's like standing on a three-legged stool.
If one leg is weak, it will break and fall because it is not balanced. This is the same in the world of trading.
If one of these trading analyzes is weak and then ignores it, it will most likely result in a loss or loss
technical analysis
Technical analysis is a trader's framework for studying price movements.
Traders can determine current trading conditions with real-time price movements.
All current market information is reflected in prices.
If the price reflects all available information, then price action is required for the transaction.
Have you ever heard the phrase, “History tends to repeat itself”?
If a price level holds up as a major past support or resistance, traders will keep an eye around that historical price level for trading.
This analysis looks for similar patterns that have formed in the past and shapes trading ideas in the same way as before.
When using technical analysis, the first thing that comes to mind is chart indicators to look for historical data!
This data will help you spot certain trends and patterns to find trading opportunities.
By looking for certain price levels and chart patterns, the more likely these patterns will appear in the market. The nature of this analysis is VERY subjective.
Understand the concepts of technical analysis so you won't have a nosebleed every time you hear the term Fibonacci, Bollinger bands
fundamental analysis
Fundamental analysis is a way of analyzing prices in terms of economic, social and political forces that can affect the supply and demand of an asset.
Using supply and demand as indicators to measure price trends is easy. The tricky part is analyzing all the factors that affect supply and demand.
In other words, you have to study a variety of factors to determine which economies are rocking, which economies are failing.
Understand the reasons why and how certain events such as the pace of the unemployment rate affect the economy or monetary policy of a country which affects the level of demand for its currency.
The idea behind this type of analysis is that if the current or future economic outlook is good, the currency is bound to strengthen.
A good form of a country's economy is, it will be seen that more and more investors do business or invest in that country.
This results in the need to buy the country's currency to acquire the assets in it.
In short, here's fundamental analysis:
For example, let's say that currently the US dollar is strengthening because the US economy is improving.
When the economy improves, raising interest rates may be necessary to control growth and inflation.
Higher interest rates make dollar-denominated financial assets more attractive.
In order to acquire these attractive assets, investors must first purchase a certain amount of dollars. As a result, the value of the dollar increases.
In later courses, you will learn which economic data points tend to drive currency prices, and why?
You'll know who the Fed Chair is and how retail sales data reflects the economy.
But for now, know that this analysis is a way of knowing the potential movement of a currency through the strength or weakness of the country's economic outlook. It will be awesome, we promise!
market sentiment analysis
Price action should theoretically reflect all available market information. Unfortunately it is not as simple as traders think
The forex market doesn't just reflect all the information out there because all traders are bound to act the same way. Of course, this is not how it works.
This is why market sentiment analysis is necessary. Every trader has their own opinion about the movement of the price direction in the way that is expected or in the opposite direction.
The marketplace is like Facebook - a complex network of individuals with the intent of spamming news pages.
The market basically represents all traders' representation of the market
Every thought and opinion expressed through any position will shape the market sentiment regardless of any information out there.
The problem is that as a retail trader, no matter how strong your feelings for a particular transaction are, you can't move the market the way you want.
Even if you believe the dollar will rise, everyone is bearish on the dollar, there's not much you can do about it. (unless you're one of GS, George Soros or Goldman Sachs!).
You have to take all this into account and need to do a market sentiment analysis.
It is up to how you measure the state of the market, whether it is bullish or bearish.
You have to decide how to incorporate the perception of market sentiment into the trading strategy.
If you choose to ignore market sentiment, you can be sure that losses will come soon!
Being able to gauge market sentiment can be an important tool in your toolbox.
In the next class, we will teach you how to analyze market sentiment and use it to look for opportunities.
Which analysis is the best?
Ahhhh, million dollar question....
Along your journey as a prospective trader, you will find compelling reasons for each type of analysis.
Don't be fooled by one-sided extremists! using only one analysis is no better than the other... these three analyzes are different ways of looking at price movements.
But in the end, trading must rely on the type of analysis that is most comfortable and profitable.
In short, technical analysis is the study of the price movements of currencies with charts. Meanwhile, fundamental analysis looks at how the country's economy is moving.
Market sentiment analysis determines bullish or bearish conditions with current or future fundamental prospects.
Fundamental factors display market sentiment, while technical analysis helps visualize market sentiment into an indicator framework for making strategies.
The three analyzes are intertwined to produce good transaction ideas.
All the historical price action and economic data is there - all you have to do is think and test your skills as an analyst!
To become a true forex trader, you need to know how to use these three types of analysis effectively.
Some examples of cases, If relying on only one type of analysis will turn into a disaster:
- Say it this way, by looking at the chart you find a good trading opportunity. then excited about the money to come and said to myself: “I've never seen a more perfect opportunity on GBP/USD. I like this indicator. Now show me the money! ”
- You then buy GBP/USD with a big smile on your face.
- But wait! Suddenly the price moves 100 pips in the OTHER DIRECTION! You didn't see the news that, one of the big banks in London was declared bankrupt! Suddenly, sentiment turned sour towards the london market and people started trading in the opposite direction!
- A big smile turns to a frown and you start to get angry at the indicator chart. You throw your computer on the ground and start destroying it because you just lost a lot of money, the computer gets badly damaged and this is all due to a complete disregard for fundamental analysis and market sentiment analysis.
You may think this is nonsense, but in forex trading the same applies when deciding to use one type of analysis.
Don't just rely on one analysis.
Instead, you must learn to balance the use of these three analyzers for maximum results.
Where are we going?
Once you're done with this level and learned a bit about the 3 types of analysis, it's time to dig a little deeper, as they will be used for the next few levels.
Basic level will cover all things related to basic technical analysis.
That is, studying the dynamics behind price action, such as support and resistance, candlestick patterns, and general chart patterns.
You will experiment with leading indicators and it's just a matter of finding out how to use them to come up with a trading plan. Sounds very interesting, right?
The remainder of the next level is devoted to learning more technical analysis instruments.
Some terms such as pivot points, divergences, Elliott Wave Theory and Gartley patterns.
Getting interested?! You definitely can't wait to start trading.
The middle and upper levels will be a little more complicated because they deal with fundamental analysis and market sentiment simultaneously.
Some of the reasons why we combine fundamental analysis and market sentiment:
When you reach the next level, you will be so engrossed in learning more about trading that one lesson will not be enough.
It's hard to make the connection between fundamental analysis and market sentiment analysis, but you'll get there with real practice.
Fundamental factors are largely responsible for shaping market sentiment.