Doing a market analysis before you take a position in the market, be it money market or the forex market, is extremely necessary in order for it to turn it into a profitable trade. If you are a foreign exchange trader or are someone who is new to this market and is willing to learn about what this side of the world has in store for you then you are at the right place to get started. But wait! Before you delve into trading you need to have a complete knowledge of the three basic types of Forex market analysis that will help you in determining whether to buy or sell a certain currency pair or not at that particular moment.
Following are the three main types of forex market analysis you need to be on top of to stay in the game.
Fundamental analysis in forex trading is analyzing different aspects of the economy and the factors that have a direct or indirect impact on it. Here you need to understand the basics of supply and demand, which you must have learned in Economics, which determines the currency exchange rate upon which the whole forex trading is reliant.
You need to also keep an eye on the recent fundamental releases, whether good or bad, and the way they have an impact on the movement of interest rates and the key fundamental factors, which include GDP, Inflation, CPI, SPI, unemployment rate, and other economic growth related activities.
The framework in which traders, including you, need to study the historic and current price movements is called technical analysis. On the basis of these movements, you would be able to determine the potential price movements and reach a final decision as to whether you need to open or close a position. But how would you be able to analyze all this huge amount of data regarding prices? Well, this is where the importance and usage of charts and their patterns come in. You need to look for similar patterns and spot trends that have formed in the past, for getting excellent trade ideas and great trading opportunities to work and act upon.
While the matter of fundamental analysis vs. technical analysis is always under debate, sentiment analysis overpowers all the types of forex market analysis that comes in its way. It’s is because, just like you, other traders in the market are humans and humans tend to take irrational decisions, on the basis of their sentiments and what they generally feel about the market.
Every trader has their own opinion regarding the way the market is behaving and how it would behave in the future. This is why even if all the traders are provided with the same numbers and indicators it is not necessary that they would come up with the same strategies and decisions, solely reliant upon the assumption that the output has got to be the same because the input was the same. These contrary opinions and positions, taken on their basis, is what forms the overall sentiment of the market and, thus, is known as the sentiment analysis.
Now since you have learned all the three types you might base your final decision on the basis results of either of these analysis or a combination of these, but we suggest you follow the one that works out for your personality.