Discussion Topic: Forex Market Analysis
As we have already gone through the most basic lessons of forex trading, now it is time learn the forex market analysis. By doing market analysis, we will actually try to predict the price movement of a currency pair.
I know you may be quite tempted right now to see how you can make money from trading, but you really have to learn all these important things before starting a successful forex trading career.
Take this as a starting point of your trading career. And remember, learning never ends and you need to work hard to learn the insights of trading.
Three Types of Forex Market Analysis
To begin our journey, let’s look at three types of market analysis technique and how they help to develop ideas to trade the market.
There are three basic types of forex market analysis:
Though there has always been a continuous debate as to which type of analysis is better, we think you need to know all three.
These three types of analysis are like the three legs of a stool. If one of the legs becomes weak, the stool will break down on the ground.
The same holds true for your trading career. If your analysis is weak in any of the three types and you ignore it, there’s a high probability that it will cause you to lose out on your trade!
What is Technical Analysis?
Technical analysis is the process by which forex traders study and predict price movement. The theory behind this is that a person can analyze historical price movements and then tries to determine the current trading conditions & potential price movement.
The argument behind using technical analysis is that, theoretically, the reflection of all current market information is seen on the price of a currency pair. So, if the price reflects all the information that is out there in the market, then price action is the single entity someone would need to make a decision on a trade.
Now, have you ever heard the old proverb, “History tends to repeat itself“?
Well, that’s fundamentally what the technical analysis is all about! It is thought that if a price level has formed a trend pattern in the past then it will also act in the same way in future. A most popular example of this is double top or double bottom price movement pattern.
In the world of forex trading, when someone refers to technical analysis, the first thing that comes to mind is a chart. Every technical analyst uses charts as this is the easiest way to visualize historical data!
In technical charts, you can look at past data to spot historical trends and patterns that will help you find some great trading opportunities. As more and more forex traders start to take trade decisions on certain price levels and chart patterns, the more likely that these patterns will replicate itself in the market.
But one thing you should remember that technical analysis is VERY subjective. That means, just because Mr X and Mr Y are looking at the exact same currency chart setup or indicators, it is not necessary that they will end up with the same idea of where the price may be headed.
See out free technical analysis course for more details.
The most important thing is that you should understand the concepts under technical analysis so you don't feel panic whenever someone starts talking about Pivot points, Fibonacci, Bollinger bands etc.
What is Fundamental Analysis?
Fundamental analysis is a way of judging the forex market by analyzing social, economic, and political forces that may affect the supply and demand of an asset. This is the most basic idea behind the price movement. Supply and demand is the ultimate thing that determines the price. See our article on how the currency exchange rates are determined for more details.
The "supply and demand" itself works as an indicator. And by anticipating the supply and demand you can predict the movement of price. But the hardest part is the process of analyzing all of the factors that could affect the supply and demand.
You have to consider at all the different factors to determine whose economy may go up and whose economy may go down. Moreover, you have to clearly understand the reasons of why and how some events like an increase in the unemployment rate or increase in interest rate affects a country’s economy and thus, affects the level of demand for its currency.
The foundation idea behind the fundamental analysis is that if a country’s current or future economic prospect is good, their currency should strengthen. The better the condition of a country’s economy, the more foreign investors will be interested to invest in that country. This will then increase the need to purchase that country’s currency to obtain those assets.
For example, if the USA increases the bank interest rate, the dollar-denominated financial assets will get more attractive to international traders. And to invest in those assets, they have to buy some US dollars first, which will then result in the increase of the value of the US dollar.
There are much more economic data points that you will need to analyze before arising to a conclusion regarding price movement. One of the most popular trading styles depending on the fundamental analysis is called as news trading, which we will learn in later chapters.
See our free fundamental analysis course to learn more.
What is Sentiment Analysis?
In the forex market, every trader acts differently in different situations. This is the reason we also need to the sentiment analysis to predict the movement majority of the traders are thinking about.
Every trader has his or her own belief of why the market is moving the way it does and whether to place trades in the same or opposite direction of the current market movement.
The market is just like Facebook / twitter - it basically represents what all traders – you, us, or other traders - feel about the market. Traders express their thoughts and opinions through whatever position they take, which typically forms the overall sentiment of the market regardless of what information is out there.
As the size of the forex market is such a huge one (5.1 trillion dollars) that regardless how strongly you feel about a certain trade, you can’t move the forex markets in your favor. Even if you strongly believe that the dollar is going to go up, but if everyone else is thinking the opposite, there’s nothing much you can do about it.
As a trader, you have to judge how the market is feeling, whether it is bullish or bearish and take your position in that direction. If you choose to simply ignore the market sentiment, that’s completely upon you. But we’ll still be telling you that it’s your loss!
We hope that you have enjoyed the above article explaining the three types of market analysis you must do to make a successful trading career. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments about your experience and how you do these types of forex market analysis.