Before diving straight into forex trading, you need to get some basics out of the way. This way, you can cut losses on your hard-earned money. If you want to become a forex market connoisseur, you need to understand the nitty-gritty of market analysis. But where do you start?
The ideal starting place is by knowing the different types of forex market analysis. But do I need to know all three? Why can’t I narrow down on one and perfect it? That’s a good question, and we are glad you asked. You need to learn all three so that you can choose the one that works for you.
Now, let’s look at the three types of market analysis, shall we?
This strategy refers to analyzing past price patterns to determine the probability of exiting or entering a trade. By studying price movements, a technical analyst can predict current trading conditions and potential price changes.
Technical analysts believe that all current market information is pegged on the price and has been reflected through price action. In other words, if the guiding principle in real estate is location, then for technical analysis, it’s price, price, and price!
And one more thing — technical analysts live, eat, and breathe charts. To them, charts are the best in visualizing historical data to spot trends and patterns, which they can act on.
While technical analysis involves scrutinizing charts, fundamental analysis is about scouring for economic data reports, news headlines, and social media trends. Fundamental analysts scan the political, social, and economic trends to see how they affect current market prices.
Fundamental forex traders analyze economies to determine the supply and demand of currencies. While it’s easy using demand and supply forces to determine where the currency is headed, the hard bit is establishing the factors behind the changes in demand and supply.
In simple terms, fundamental analysts establish which economies are doing well and those underperforming. Then they use this information to predict where exchange rates could be heading. Of course, if a country’s economy looks promising, its currency should strengthen, becoming a hotbed for investors — and vice versa is true.
This technique gauges the general feel of traders regarding the currency market or a currency pair. Unfortunately, if you are a small trader, there is nothing you can do about market sentiments. For instance, if you feel like the dollar should go down and everybody else is bullish, you can’t do much. However, you can turn the perception of the market sentiments into a trading strategy. How? You can spot early shifts in the market consensus and position yourself strategically at the onset of significant trends.
The Bottom Line
Having familiarized yourself with the different types of forex market analysis, you might ask: Which is the best? The truth is none is better than the other. You can trade with the strategy that works for you, but you shouldn’t ignore the other two. As you take a deep dive into forex trading, you will establish that the three complement each other.