The following are the ways traders use to analyze the Forex markets:
- Fundamental Analysis
- Technical Analysis
- Sentiment Analysis
What is the best analysis to use depends on your personality and preference; it is, however, recommended for you to know and understand the three of them as they all affect market movements.
Also known as currency news trading.
In fundamental analysis, you are taking into account a country’s economic, social and political environment when trading. As a general rule, when a country’s current or future economic outlook is good, the currency price will strengthen.
The following are some of the factors that cause Forex market to move:
- Interest rate
- Gross Domestic Products (GDP)
- Employment situation (i.e., non-farm payroll)
- Trade balance (export versus import)
For example, when an interest rate of a country is raised, its currency tends to strengthen, since investors tend to purchase more of the country’s currency due to the higher interest rate. Conversely, if the interest rate is cut, the currency will weaken as investors invest their money in other currencies with higher returns.
As you trade more, you will understand the importance of fundamental analysis better.
Technical analysis involves analyzing historical price movement of a currency pair to look for a pattern and determine when to enter and exit a trade at profitable position. In here, chart patterns and indicators are used to determine behavior of a currency pair since chart reflects human emotions – greed and fear.
Before entering a trade using technical analysis, most traders review if there is a pending Forex news release, since this news release may affect the direction of the currency pair’s movement.
Sentiment analysis involves evaluating the overall feeling of all traders regarding the currency’s direction.
In theory, price should reflect all available market information. However, this is not the case as each trader reacts differently on the available market information. In sentiment analysis, you need to consider the MAJORITY’s feeling.
For example, if you feel that USD is in bullish, but the rest of the market says otherwise, it would be impractical to go long since the direction of the currency is downwards.
It is important to gauge the market’s sentiment before entering a trade since a currency’s price is influence by overall feelings of different traders.