The 3 Types of Forex Analyses

Okay, so now you’ve learned some Forex history, how the forex market works, and all the basics of the game. But we bet you’re probably thinking, “When do I actually start trading?”

The good news is that this lesson brings you closer than ever. But first, have you ever wondered how traders know when to trade?

How Do Traders Know When to Trade? 

Well, usually, you will need to analyze and develop ideas in order to trade the Forex market. That is, of course, the first thing you need to do when you start trading the foreign exchange market, and it involves the same process as trading the stock market or the futures market.  You will have to choose a certain currency pair (or a number of currency pairs) to trade and find market analysis tools that help you predict market movements and forex market trends of financial instruments in the forex market.

But how do you know what currency pair to trade, and how do you actually decide when to buy and sell currency pairs in forex trading? In other words, how do you develop your own trading style and come up with good forex trade ideas? The answer is that there are three types of forex analysis that most forex traders (and retail traders in general) use. These are technical analysis, fundamental analysis, and sentiment analysis.

The Three Types of Forex Trading Analysis

Throughout your journey as a Forex trader, you’ll most likely come across three different types of Forex market analyses:

• fundamental analysis
• Technical analysis, and
• Sentiment analysis. 

But which type of Forex market analysis is the best for you?

1. Technical Analysis

Technical analysis helps you get the historical price action of an asset displayed on a chart. So, in one quick look at a price chart, you can get lots of information about the currency pair exchange rate and the overall sentiment. But more importantly, when using technical analysis as a trading technique, you’ll be able to use various technical indicators that assist you in identifying the future price movements of financial assets.

Simply put, technical analysts believe that markets are repetitive in nature and, thus, have repetitive patterns. The idea of technical analysis is to predict market movements based on past price movements and repeated patterns. And it works. ‘

Some technical analysis tools include indicators, chart patterns, and candlestick patterns. You’ll also have access to charting tools on your trading platform with which you can conceptualize ideas like supports and resistance levels.

2. Fundamental Analysis

Fundamental analysis helps forex traders to make more rational trading decisions based on economic figures and data. A forex trader who uses fundamental analysis as a trading technique will look closely at the economic calendar to get more information about various factors.  Some of these economic indicators include interest rates, gross domestic product (GDP) growth, trade deficit, labor statistics, consumer price index, earnings reports, and many more. 

Political factors and major news events also play huge roles in fundamental analysis techniques.

So, unlike technical analysis traders, fundamental analysts try to determine the future price movement of a foreign currency based on the intrinsic value of the country’s currency and its economy. 

3. Sentiment Analysis

Sentiment analysis involves trying to gauge how people feel about a currency pair or about each currency in the pair, and they make trading decisions based on that. If people are feeling positive about a pair, you’re feeling positive too. And if you’re a contrarian trader, you’re feeling negative when others are feeling positive about the same currency pair you’re going contrary to the general market sentiment.

For instance, you could pick the EUR currency from the EURUSD pair and perform its sentiment analysis. By doing this, you’re trying to gauge the strength of the EUR based on the sentiment of others on it. You use tools like the Commitment of Traders (COT) report provided by the Commodities Futures Trading Commission (CFTC). You could also use the position summaries supplied by your broker, where brokers publish the total percentage of traders going long or short on a particular currency pair. 

Key Takeaways

• Traders have to analyze the forex market before they can place trades.
• There are three analysis approaches: Technical, Fundamental, and Sentiment analyses.
• Technical analysis involves the use of repetitive chart patterns and price action tools to predict future price movements.
• Fundamental analysis deals with the understanding of the overall macroeconomics of the currencies involved in the trade, and making trades based on these.
• Sentiment analysis is the gauging of how people feel about a currency pair. If there’s an overall positive or negative sentiment about the pair, you’ll want to mimic that sentiment in your trade.

Wrapping Up

That’s it for now. You know what fundamental analysis, technical analysis, and sentiment analysis are. As a starting point, you need to explore an economic calendar, find out the meaning of each economic data, and learn more about technical indicators and sentiment analysis.

In the next course, we’ll take a closer look at both technical analysis and fundamental analysis and how you would analyze and develop ideas to trade the Forex market using each of these forex market analyses.