What Are the Three Types of Forex Market Analysis?
Analyzing the market is one of the most important things you can do as a Forex trader. Whether you’re a beginner or seasoned veteran, you need to know how to look at the market and creatively conceptualize profitable trades.
What newcomers quickly realize is that there are three types of analyses that can be performed on the foreign exchange market. All three of them must be utilized in synergy to provide you with a realistic perspective of the market. Mastering all three can lead to longevity and consistent profitability.
Technical analysis is based on the premise that history will repeat itself in predictable ways. Here, we are only looking at price movements in the past and using this information to reach conclusions about current and future trading conditions. Using a chart, Forex traders can find patterns and identify great trading opportunities before anyone else. The only downside to this kind of analysis is that two individuals looking at the same chart can reach completely different conclusions about the direction that the price is going. This often leads to subjective and occasionally inaccurate analysis of the market.
Fundamental analysis involves examining the supply and demand of a given asset from political, economic and social standpoints. Although you could say it’s based on simple supply-and-demand, there is far more happening beneath the surface. Major political events and changes in a country’s economy have a direct effect on the demand for the currency of that country. Be careful with this kind of analysis – a currency performing well in the present will not necessarily perform well in the future. This makes fundamental analysis rather volatile and provides credence to the idea that all three types of market analyses need to be used.
Last but certainly not least, we have sentiment analysis, which involves making trading decisions based on how a market “feels.” Depending on the trade in question, the market will feel bullish or bearish about it. You need to recognize what that sentiment is and factor it into your trading decision.
By analyzing the market on a daily basis using these three approaches, you can set yourself up for success in the world of trading. Though it sounds like a lot of work, it can pay great dividends in the long run.
What is your opinion on these three types of Forex market analyses? How do you use them in you trades? Let us know on social!
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