Analysis of Forex Trading
Now that you have understand what Forex trading is, how it works, why people trade Forex and the elements of its trade, you might think that you are ready to start your trading. Unfortunately, you have to hold on to your horses as there are still some other things that you need to know in order to trade successfully and avoid burning a big hole in your pockets.
To start with, you should know that there are three kinds of Forex market analysis which you must take into consideration before you place your trade and they are the Technical Analysis, Fundamental Analysis and Sentiment Analysis.
Technical Analysis
Technical analysis is the study of the currency price movements with the aids of technical studies, charts, indicators and other tools. The theory is that one can look at the past price movements and determine the present trading conditions and its future price movements.
Technical analysts use charts to visualize past data so as to spot trends and patterns which could assist them to identify positive trading opportunities. All traders depend on technical analysis, price patterns and indicators signals to help them determine when and where to enter and get out of their trade.
There are only two things that traders always look for in the technical analysis which is identifying the Trend and the Support or Resistance level. Furthermore, the markets can only move to three different directions – up, down or sideways.
Fundamental Analysis
Fundamental analysis is a method used by investors such as George Soros and Warren Buffet to analyze all media reports concerning economic, social and political events that may affect the value of an asset. It is the value or in this case, the supply and demand that decides the price or the rate of the currency exchange.
It is very simple to use supply and demand as a gauge to identify the direction of the price. The difficult part is analyzing the reasons that affect both.
In other words, you have to take into consideration all the factors to decide whose economy is strong and whose is weak. You need to know the reasons why and how a certain crisis such as an unemployment rate affects a country’s economy and the monetary policy that finally, affects the rate of its currency.
The concept behind this method of analysis is that if a country’s present or future economic prospect is favorable, their currency should strengthen. If a country’s economy is in better condition then, more investors and foreign businesses will want to invest in that country. This causes the need to invest in that country’s currencies or assets.
Sentiment Analysis
Each trader has different view of the forex market and why it is performing the way it does. The market simply depicts what all traders feel about it. Each trader’s ideas and sentiments, which are reflected through whatever trade they make, help shape the general sentiment of the market irrespective of whatever information is out there.
The problem is that as a trader, however strong you feel about a particular trade, you will never move the forex market to your advantage. Even though you believe that the particular trade is going long, but other traders are going short and you cannot do anything about it.
Therefore, as a trader you have to accept this and do the sentiment analysis. You need to evaluate the feeling of the market whether it is going long or short, and you determine how you want to combine your observation of market sentiment into your trading strategy.
Which type of Analysis is best for Forex Trading?
Since you now understand the three types of analysis, you would want to know which type is better. Actually, none is better than the other. They are just different methods of looking at the market. You should trade according to the type of analysis that you feel comfortable with.
In summary, technical analysis is the study of currency price movement. Fundamental analysis takes a peep at how the country’s economy is faring. Sentiment analysis decides whether the market is going long or short on the present or future fundamental prospects.
Fundamental factors create sentiment, while technical analysis assists us to visualize sentiment and apply a guideline to form our trading plans.
These three analysis compliments each other and all you need to do is to know how to effectively use them.
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