To analyze and develop ideas to market in forex there are basically three types of forex market analysis:
1. Technical Analysis
2. Fundamental Analysis
3. Sentimental Analysis
It’s like a stool with three legs – if one leg is weak, the bank will break under your weight and you’ll come face to face on the floor. The same goes for forex trading. If your analysis in any of the three types of trading is ignored, there is a good chance that you will lose in the transaction.
Technical analysis is the parameter on which traders study price movements.
The theory is that a person can look at historical price movements and determine from these current commercial conditions and potential price movements.
The main evidence for use technical analysis is that, theoretically, all the information about the current forex market is reflected in the price. If the price reflects all external information, then the action is all you need to know in order to do a transaction.
Now, you’ve heard the old saying, “History tends to repeat itself”?
Well, that’s basically all the technical analysis! If a price level had a strength in the past, traders will keep an eye out for him and will have its business base around that level of historical prices.
Technical analysts look for similar patterns that have formed in the past, and which will form Operating ideas believing that the price will be the same as had once been.
In the business world, when someone talks about technical analysis, the first thing that comes to mind is a graph. Technical analysts use charts because they are the easiest way to view historical data!
You can look at the previous data to help you identify trends and patterns that might help find some great shopping opportunities.
Furthermore, as all traders dependent analysis technique, these patterns price indicators and signals tend to become self-fulfilling.
The more traders look at certain price levels and chart patterns, the more likely it is that these patterns to unfold in the market.
But you should also know that technical analysis is very subjective.
The important thing is that you understand the concepts of technical analysis to make no mistake when people start talking about Fibonacci, Bollinger bands or pivot points.
Fundamental analysis is the way to watch the forex market for analysis of economic forces, social and policies that affect supply and demand for assets. If you stop to think about it, it really makes sense! Like everything in economics, supply and demand that determine the price.
Using supply and demand as an indicator, any price would be calculated easily. The hard part is to analyze all the factors that affect supply and demand.
In other words, you have to look at different factors to determine which economy is growing and that the economy is falling. You have to understand the reasons of how and why certain unemployment increased events affect the economy, and consequently the demand for its currency.
The idea behind this type of analysis is that the current economy or future of a country is good, its currency will be strong. The better the economy, more foreign investors will invest in the country. This results in a currency purchase necessary to enter that country investments.
For example, let’s say that the US dollar has gained strength in the US economy is growing. As the economy improves, interest rates are increased to control the growth and inflation.
The higher interest rates make the dollar more attractive financial assets. In order to get their hands on these great assets, traders and investors have to buy a few bucks first. As a result, the value of the dollar will increase.
Earlier, it said that the price should theoretically accurately reflect all available information on the forex market. Unfortunately for us traders it is not so simple. Markets do not only reflect all external information that all traders will act the same way. Of course, that’s not how things work.
Every trader has their own opinion or explanation of why the market is acting the way they do. The market is just like Facebook, a complex network of individuals who want to stop spam on our news feed.
The forex market basically is what all traders feel about the market. Every thought and views of traders are expressed through any position they take, helps form the overall market sentiment.
The problem is that as marketers, no matter how strong your conviction about certain operation, you can not move the market in their favor. Even if you believe that the dollar will rise, but everyone is pessimistic with it, there is nothing you can do about it.
As a trader, you have to take all this into account. You have to understand what the general feeling of the forex market, whether it is high or low. Finally, you have to figure out how you want to enter the market of feeling in your trading strategy. If you choose to simply ignore market sentiment, the choice is yours, but probably will have losses.
Be able to assess market sentiment can be an important tool in your toolbox.