Types of Forex Analysis

There are three types of forex analysis

To start, let’s look at three ways of how to analyze and develop trading ideas. Here are three main types of forex analysis:

1. Technical Analysis
2. Fundamental Analysis
3. Sentiment Analysis

There are always constant debates as which type of forex analysis is better, but actually, you need to know all three.

forex analysis

 

It’s kind of like a stool with three legs – if one leg goes away, the stool will fall under your weight and it will be extremely unpleasant for you. The same is in trading. If you do not know any of the three forms of forex analysis, and ignore it, there are chances that you will fail in your trading practices.

1. Technical Analysis

The basis of technical analysis is the study of motion graphics in exchange rates. The chart reflects the impact of fundamental factors on the change in prices. The following factors are taken into account in technical analysis:

The chart reflects all information about the market.
History repeats itself. Consequently, in order to know what will happen in the future, we need to explore the past.

2. Fundamental Analysis

Fundamental analysis is an analysis of the economic and political status of countries whose forex-market-fundamental-analysiscurrencies are traded in the Forex market. The task of fundamental analysis is to evaluate the possible impact of certain events on exchange rate movements.

Fundamental analysis includes an forex analysis of the economic indicators. They are published on a regular basis and provide an opportunity to explore trends in the economies of various countries. The results of these studies allow us to explain the current exchange rate movements and predict future movements. For example, when in the United States there is a constant increase in consumer and producer prices, which is accompanied by employment growth, the market may begin to talk about the existence of the possibility of raising rates, which, in turn, may lead to a rise in price of the dollar.

Advantages of Technical Analysis

  • The fundamental macroeconomic analysis is very complicated. In most cases it is impossible to take into account all the factors affecting the market. Technical analysis is much easier as it explores only one object – a graph of price changes.
  • Technical analysis has a large number of supporters who are active market participants. They use the same charts to give similar results and making the same conclusions. This mass consistency, in turn, affects the price movement, leading it in a favorable direction. Thus the forecast forms the execution itself.
  • Technical analysis is universal – it can be used in various financial markets basically unchanged.

3. Sentiment Analysis

Forex investors are another widespread form of analysis. When you see that the sentiments of the vast majority of investors are located in one direction, it means that the vast majority of traders have open respective positions.

Perhaps it is easier to explain with an example. Let’s assume that the overwhelming majority of traders and investors took the buy position in euro. They believe that the euro will rise. Since people vote their trade, we can estimate by Speculative Sentiment Index that the mood (Sentiment) in relation to the EUR / USD pair shows that the majority of traders are the buyers of this currency pair.

Since we know that there is a large mass of traders who have already bought, these buyers have become prospective sellers. We know that because in the end, they want to close the position. This makes the EUR against the US dollar vulnerable and the EUR / USD can dramatically go down, if these buyers turn around and start selling to close their positions.

Finally:

There is a continuous debate between the supporters of fundamental and technical analysis. Fundamentalists believe that the price history can not predict future price movements and techies argue that a chart is inherently all (including fundamental factors). In addition, there is an interesting type of market analysis as an investor sentiment. In our opinion it is not necessary to refuse any of these types of analysis of the Forex market without first having tested it in practice. The ideal option would be a combination of several types of market analysis to the extent that is right for you.

 

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