The 2 Types of Forex Analyses

Okay, so now you’ve learned some Forex history, how the forex market works, what affects the prices of currency pairs, and what forex broker you should choose to start your forex trading journey. This is all obviously mega important, but I know what you’re now thinking…

BOOOORING! SHOW ME HOW TO MAKE MONEY!!!!

Well, say no more my friend because here is where your forex trading journey as a Forex trader begins… Now, let’s say you want to place your first trade in the forex market, on a demo account or live account. You need something to rely on – a trading strategy, trading plan, some indicators that will help you get the sentiment in the market. After all, you are trying to predict the future. That’s right. When you trade forex, you are trying to predict the future price movements of various currency pairs. 

So, if you are trying to predict the future, you need a plan and a technique to do that, right?. With that in mind, let’s get a quick look at two of the most widely used trading techniques among forex traders – technical analysis and fundamental analysis. 

How do you decide what currency pair to trade? And how do you know whether to buy or sell? 

Well, normally 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 – there are two types of forex market analysis that most forex traders (and retail traders in general) use. These are technical analysis and fundamental analysis.

In terms of what’s the best currency pair to trade – most forex traders focus on high liquid assets that are also often covered in the news. This way, it’s much easier to use technical indicators on a candlestick chart and find fundamental factors that reveal more information and economic data about the country’s economy. For example, if you decide to trade the US dollar versus the Canadian dollar, you can easily find market information and fundamental news about each one of the currencies as well as many reports and forecasts that relate to this specific currency pair. This is, for example, not very possible if you decide to trade an exotic currency pair like the GBP/BRL. So, at least at the beginning of your currency trading journey, it would be best to focus on one of the major or minor currency pairs. 

Then, you need to form and develop a trading strategy or a trading plan that helps you predict the future price action of a particular market. Theoretically, there are three types of forex market analysis if we include the market sentiment analysis. However, sentiment analysis is not really a technique but rather a way of learning how to identify the market sentiment and get access to sentiment indicators on various trading platforms and online sentiment analysis services. So, for now, let’s focus on two of the most important methods to analyze the forex markets. 

Two Types of Forex Trading Analysis -Technical Analysis and Fundamental Analysis

Throughout your journey as a Forex trader, you’ll most likely come across 2 different types of Forex market analyses – fundamental analysis and technical analysis. But which type of Forex market analysis is the best for you?

The million-dollar question… Everyone would love to know the answer to that. There has always been a constant debate as to which forex analysis is better, but to tell you the truth, in forex trading, you need to know and use both.

And throughout your journey as a Forex trader, you will find strong points for both types of analyses. 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 you are 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 the exchange rates’ historical prices and repeated patterns. And, it works. 

On the other hand, fundamental analysis helps forex traders to make more rational trading decisions based on economic figures and data. A forex trader that uses fundamental analysis as a trading technique will look closely at the economic calendar to get more information about various factors.  These include interest rates, gross domestic product, trade deficit, labor statistics, consumer price index, and many more. So, unlike technical analysis traders, fundamental analysts try to determine the future direction of a foreign currency based on the intrinsic value of the country’s currency and its economy. 

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

In the next sessions, 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.