These types of forex analysis are popular with all traders in the market. Before you take any trades, you must have a strong reason as to why you want to take that trade.
Every trader has a strategy he/she trades every time he/she gets to the market. In other words, to make that final decision to enter a trade, you have to do analysis on the forex market first.
Qn: What is forex analysis?
Ans: Analysis is the Study of nature of something by breaking it into small parts in order to gain a better understanding of it.
As a Forex trader, you must do analysis on the market first before making any decisions to trade.
This helps you to know what happened in the past, what is happening now and what is likely to happen in the future.
3 common types of forex analysis.
Namely;
- Technical analysis
- Fundamental analysis
- Sentimental analysis
The three work hand in hand although you can choose to master one of them and concentrate on it. But the fact is you need all of them.
Let’s take a quick look on each of the types of forex analysis and later, we shall explore more on analysis as a single topic in one of our next sessions.
Technical forex Analysis
Technical forex analysis is the study of historical price action to identify patterns and determine probabilities of future price movements in the market.
You can do this using technical studies, indicators and analysis tools. Among the 3 types of forex analysis, this is the popular one among traders
Technical analysis says that, a market has a memory. Therefore, future changes will be influenced by the patterns of its behavior in the past.
“History tends to repeat itself”.
This means that there are higher chances of something that happened in the past to happen a gain in future.
As the market trends, it tends to leave marks and signals at certain levels. This is likely to happen again in future as price goes through those same levels.
For example, taking in consideration the levels of support and resistance.
The way patterns performed and behaved leads to a conclusion they will continue to work well in the future.
The market either moves up and down or tends to continue in a side ways direction.
As traders tend to follow these marks and signals in the market, more chaos is created due to forces of demand and supply. As a result these signals become more certain and tend to be real.
Therefore, it becomes more of a self fulfilling prophesy.
Technical analysis is more applicable through the points of congestion, support and resistance levels, chart patterns and the behavior of candlesticks.
These can be identified through use of indicators, charts and other forex analysis tools.
In conclusion
- Technical analysts predict price movements and future market trends studying what happened in the past using charts.
- They are only concerned with price movements not the reasons why they occurred.
- They identify patterns of market behavior that were recognized in the past as significant and likely to happen a gain in future on several occasions.
Fundamental Analysis
Fundamental forex analysis is interpreting forex market behaviors by studying different countries economies.
Traders look at how most fundamental economic factors such as political activities, financial policies, growth rates and crisis affect the market.
In brief, fundamental analysis is the study of what actually causes market price changes .
Under normal circumstances, price is determined by forces of demand and supply. And demand and supply is highly influenced by;
- Economic factors like inflation, employment,consumer behavior and price index.
- Political crisis like elections, change of government, wars and instabilities
- Financial policies like the monetary policy, fiscal policy and macroeconomic policies.
- Environmental factors, like landslides, tsunami, drought, pandemic diseases
How fundamental factors affect currency price value
When a countries economy is doing great for example with high GDP, high inflation, high employment, high consuming confidence and high purchasing power, its currency appreciates.
Basing on the above, fundamentals traders are likely to buy more of the currency because they expect more yield from an appreciating currency.
On the other hand, if a country is facing issues like political crisis, high levels of unemployment, lower inflation and lower consumer confidence, this affects her currency. As a result, investors are likely to keep their money in a more valuable currency hence selling off the currency in question.
Economical factors like the release of Non-Farm Employment in United States(Non-Farm Payroll), measures changes in employment. It strengthens the Dollar when the economy is doing well and weakens it when the economy is bad.
Therefore, a currency price value is very sensitive to the fundamental news release.
All in all, fundamental economic data has a great impact on exchange rates for the different currencies traded on the market. Therefore it’s always important to know when such new release happens.
Follow up the economic calendars to know the dates and time for release of such information before engaging in any kind of trade.
Sentimental forex Analysis
Sentimental analysis is quite different from the 2 types of forex analysis above,
It’s all about the market feelings and emotions.
You must now know that the market is composed of buyers and sellers of different sizes. That is, the market makers who are the big influence of the market, the retailers and you and me the speculators.
Sentimental analysis shows how different traders in the market choose to whether follow the trend by buying when the market is going long or go against it.
But the truth is, no matter how strong your feelings are, you have got to control them.When the market is up you buy and when it is down you sell. Your single decision as a trader cannot make any change on the market small as you are.
When the market is going up / uptrend, it gives you a signal that more traders will buy resulting to the rise of price or appreciating of the currency and vice versa.
As a trader you need to first confirm the mood of the market participants so that you are able to respond positively.
Buy when the market is going up and Sell when the market is going down as simple as that. We shall expand on all the 3 types of forex analysis in next sessions!
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