Trading the forex market involves great discipline and dedication to analyzing the market. To make a sound and reliable decision to sell or buy a currency, traders need to perform several types of analysis and strictly follow the rules of their trading strategy. Whatever your strategy is based on, it probably involves one of the following types of analysis, or a combination of them. The most important types of analysis in the forex market are:
- Technical analysis
- Fundamental analysis
- Sentiment analysis
Technical analysis
Technical analysis is a relatively young type of analysis, but it has already gathered a significant number of followers – especially in the forex market. The basic premise of technical analysis is that historical price action may predict the price action in the future. That means, all you need to make a trading decision is to just looking at the chart!
The forex market, being open 24 hours a day, creates a lot of data that can be analyzed with technical analysis, making it such a popular type of analysis in this market. Technical analysis involves studying of price trends, charts, indicators, support and resistance etc. and will be covered in detail in the next lessons.
Fundamental analysis
The other major type of analysis is fundamental analysis, which tries to measure a currency’s real value based on various news and economic indicators of a country. Similar to a stock trader who analyses the stock with news about the company, forex fundamental traders analyze the currency with news from a particular country. To do so, traders follow news, economic data reports like GDP growth and inflation rates, political and social events of a country to arrive at the true value of a country’s currency.
Sentiment analysis
The third type of analysis, called sentiment analysis, tries to give an insight into how market participants are feeling about a currency – are they bearish, bullish or neutral. Psychologically, people tend to follow crowds and unconsciously act in similar ways. That’s where sentiment analysis comes into play, which is especially useful when combining with technical and fundamental analysis. It’s always good to know how market participants feel about a currency, are they optimistic or pessimistic. In the end, it’s supply and demand that drive the value of a currency.
Which Type of Analysis for Forex Trading is Best?
This is a million-dollar question and any trader you ask will probably have a different answer. The truth is, no type of analysis is better than the other per se. For some traders, they might feel the most comfortable using technical analysis because they don’t want to follow all the news required for fundamental analysis. For others who enjoy short-term big wins, fundamental analysis is what determines the true value of a currency in their eyes. At the end of the day, you should choose whatever analysis you feel comfortable (and profitable) with, but keep in mind that using all types of analysis in combination – although it might seem overwhelming in the beginning – could really be worth the effort.
