The forex trader needs to study the market to trade effectively for gains while minimizing losses.
Different types to analyse forex trading are available to the foreign exchange trader.
Traders often opt to use one variety or combination of the techniques depending on their preference or trading style.
Probably you are wondering which analysis will lead you to profitable trading. To answer this question, let’s explore the types of trading analysis.
Types of Analysis in Forex Trading
while forex trading analysis is available freely online, technical experts and including scammers sell trading analysis and tips online.
Besides, the technological savvy forex traders can develop their trading analysis system.
The three common types of analysis to analyse forex are Fundamental, technical, and sentimental.
1. Fundamental Forex Analysis
Fundamental forex analysis uses economic, social, and political drivers to study changes in the forex market.
Fundamental trading involves monitoring and evaluating macroeconomic data such as interest rates, employment figures, gross domestic product (GDP), production, retail sales, consumer confidence level, and others.
For instance, when analyzing EUR/USD currency pairs, traders will consider GDP and employment figures in the Eurozone more than in the US.
Forex news emanating from European countries will significantly impact on the euro.
Fundamental trading analysis needs an in-depth understanding of macroeconomics and geopolitical events.
Forex news in the geopolitical arena, such as the current China-US trade tensions, Brexit talks, and North Korea nuclear program, significantly impacts currency carry trade.
Also, the impacts of the coronavirus global pandemic lockdowns measures have ravaged the world economies.
Hence, the best fundamental indicators affect supply and demand that determine price movement in the forex market.
While looking at the indicators could be a simple exercise, the evaluation of all the fundamentals affecting supply and demand is quite tricky.
This is because you have to determine which economy is better than the other.
You need to understand why a country’s economic data, such as an increase in unemployment rates, interest rates, and economic stimulus plans affect the supply and demand of its currency carry trade.
2. Technical Forex Analysis
Technical analysis is the widely used type of forex trading analysis because reading signals is simple, making forex trading straightforward.
To analyse forex market, trade analysts look at technical indicators to decide on the forex market.
The trade analyser can use either a manual or an automated system.
The manual method requires the trader to personally look at the indicators and signals, while the automated system relies on a programmed computer system to do the forex technical trading analysis.
Using the automated forex trading analysis is highly advantageous as it removes emotions in forex trading sessions.
Emotions in forex sessions often lead to costly mistakes.
Must Read: How to control the emotions in trading
With the advancement of information technology and the availability of high-speed internet, technical traders rely solely on trading platforms provided by forex brokers.
Trading platforms such as MT4 have an array of forex analysis tools for their clients.
Related: Top online forex trading platforms 2020
Forex trade analyser uses historical price changes data to determine the possible price movement directions in current forex trading sessions.
Technically fundamental indicators are factored into the present and future market prices. Forex analysts use charts and trends to analyse forex sessions.
They technically rely on historical data to determine patterns and probabilities of the next price movement.
Charts easily visualize historical data. Thus, it is easy to spot trends and patterns as history has a way of repeating itself.
Ideally, if a country’s economic outlook is right, then its currency should strengthen.
Experienced and trained traders analyze forex charts to determine support and resistance levels of currency pairs based on the past levels.
Besides, forex sentiment charts and trends show which currency is gaining strength or weakening.
However, technical trading is very subjective and may, at times, lead to inaccurate analysis.
This is because two people looking at the same forex sentiment chart can draw different conclusions on probable price movement.
3. Sentimental Forex Analysis
Sentiment analysis forex – the type of forex trading analysis -estimates how other forex traders feel about a certain currency pair.
The sentiment analysis is essential because forex traders have varied opinions and take positions, forming overall sentiment of the market irrespective of forex signals.
However, no matter how you feel about a currency pair, the forex market remains unchanged by your feelings.
As a trader, you have to gauge the market to determine whether it will be bearish or bullish.
According to psychologists, people tend to follow crowds- bandwagon effect- and unconsciously act in the same ways.
After gauging the market using the forex sentiment tool, how to incorporate market sentiments is the next step.
Experienced traders use forex sentiment tool as a contrarian indicator.
First, if most people share the same view, then it’s time to go against it.
For example, cut short when everyone believes that a currency pair is going to be bullish.
Secondly, about 80% of traders often lose money in forex trading, following them will most likely lead you to a loss.
During negative sentiments, forex traders often embark on risk aversion measures and favor the safe-haven currencies such as the American dollar, Swiss franc, and Japanese yen.
On the other positive sentiments cause traders to seek the risker forex markets with higher returns.
For example, the fears of the second wave of coronavirus infections, as indicated by daily high records of covid 19 new cases in China and some states of the United States of America, have negative global sentiments.
In a positive mood, hopes for possible treatment of coronavirus infection automatically generates positive global sentiments.
Conclusion
None of the analysis is better than the other but is just different ways of looking at the forex sessions.
The three types of forex trading analysis complement each other to help traders come up with good forex trade ideas for profitable trading.
But whatever method you choose, make it logical and straightforward to avoid trading analysis paralysis.
As you become experienced in forex trading, you will learn to apply these different types of forex analysis effectively.
While fundamental analysis identifies long term trends using current news and economic data, technical trading indicates ideal entry and exit points using charts.
On the other side, you can use sentiment analysis forex as a contrarian indicator while entering or exiting the currency carry trade.
Successful application of the three types of forex trading analysis will ensure that you will be in forex trading for a long time and possibly achieve your financial goal.