Three Types of Analysis

To enhance results, you are going to need to be able to appropriately analyse the market. This usually involves taking a wider view of economic trends.

Effective market analysis begins by paying attention to the situations in one country and also major developments in a region or economic sector. Market analysis is a mix of several analyses, including expert reviews, technical analysis, fundamental analysis and risk management. However, as technical analyst traders here at Trading College we look solely at the charts. This is where all the buying and selling takes place and so to be able to spot new trades we need to be looking closely at a chart.

Are you seeking to be a profitable and successful trader of the forex market?

Some traders will just look at the charts, some who are seeking to be a trader may need to know the three types of forex market analysis that some traders, investor and financier looks at every day. There is not just one way to trade.

The traders who really know how to play this game will trade and make decisions from a chart. Others use a variety of ways to analyse and develop ideas that they then go on to trade. The three types of forex market analysis are:

  1. Fundamental Analysis
  2. Sentiment Analysis
  3. Technical Analysis. We look at TA opportunities in the markets as we believe that the price and patterns on the chart give you the highest probability of making consistent profits.

In some cases, some traders use all three and some only use one or two. If you use all 3 it can be time-consuming. Looking at a chart keeps it simple.

It really depends on your experience and what resonates with you as an individual. You do not have to get overwhelmed by the three analyses. The great thing about all three is that with more time spent in the markets the more you learn, even if you start out knowing nothing. Making decisions based on what the charts are saying is the preferred way at Trading College.

When you have three different types of forex market analysis all saying the same thing then that’s a very strong signal indeed and you have a variety of different traders and investors going the same way which enables for strong long term trends.

Fundamental Analysis

When you hold a position for a long time (months or even years), this is the type of analysis you may want to use. It analyses social, economic and political forces that affect how well, or not, a country, or economy, is doing.

The underlying element behind the fundamental analysis is that if an economy is perceived to be doing well most people would want to put their money there. Perhaps open up or expand their business, buy property or stocks and so on. Of course, to do all this you would need to buy the currency of that specific country which of course would send the currency rate higher as demand increases. The stock markets lead the economy by 6 Months so just like in 2007 when we started to see the stock markets make a final high in the charts, we then found out that the economy was in trouble with a banking crises. It was all in the charts before it was public.

However, if an economy is perceived to be doing poorly then most people would probably want to move their assets out of that economy and put it in another economy that is doing better. If people start selling up their businesses, houses or stocks then to put their money in a different economy they would give up one currency for another currency. This process of ‘selling’ would send the currency rate lower as more people would see this trend and create a snowball effect.

So, in summary, Fundamental Analysis basically looks at the strength or weakness of a country’s economic outlook. Below is the Bank of England important economic numbers.

Sentiment Analysis

This is perhaps the most difficult market analysis. It is based on the current mood in the market from all players involved (including you). Since it has no laid down rules, it is difficult to master. Below is the sentiment of certain currency pairs taking from IG Index brokerage. You can see that 54% of traders at IG Index are long the EURUSD and 46% are short. This does not take into consideration how long the traders have been holding the position.

However, it is a very important type of analysis regardless of what ‘should’ happen based on the rules, it’s the players in the market, like you, that really determine where the market goes. It’s the overall sentiment. Sentiment can reach very high levels as it did recently in BITCOIN. When it gets to extreme it’s time to do the opposite. This is because no one is let to buy.

Sentiment can either be positive or negative. In order to figure out the polarity of market sentiment, you have to see how the market reacts to news announcements. For example, if the US gets a bad unemployment report (which would mean more people are unemployed and not contributing to the economy as well as the sign that perhaps companies aren’t hiring) that is typically bad for the economy which is then bad for the currency. Many would expect the USD to fall. However, if the market does the opposite of that and the USD rises then you could say the sentiment is positive. Perhaps the majority of traders didn’t feel it was that bad and maybe they’re expecting some good news in the weeks to come. You’ve just analysed the overall sentiment of the USD.

Below is IG Index Sentiment. This represents IG clients only.

Technical Analysis

For beginner traders and advanced traders, this is most popular market analysis. It gives them a framework that helps in studying the price movement (which is the exchange rate). Technical analysis is based on a notion that historical price moves can determine future price moves because history, supposedly, tends to repeat itself. We use our trading systems and strategies that determine our trading decisions and whether we want rick any money on the trade.

There is a fancy title for a trader of the forex market who uses technical analysis—Technical Analyst.  The job of a technical analyst is to study the chart of an exchange rate and look for patterns and trends in order to find great trading opportunities. They look for market indicators and forex signals.

Many people use technical analysis in studying the market. As a result, many people look at the same patterns and price levels. We have our own trading systems and trading indicators that give us the signals to get into a trade.

DAX Chart below with the Pro-Trading System signals

Further Reading:

What is Forex Trading?

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What Type Of Trader Are You?

There are several things that separate the average traders from the great traders—guts, intelligence, instincts, and, most importantly, timing. Just as there are many types of traders, there is an equal number of different time frames that assist traders...

What Do I Need To Start Trading?

What Do I Need To Get Started? Becoming a trader: It’s one of the questions that we’re frequently asked. “I’m looking at trading courses online, so what do I need to get started?” “Forex trading, can anyone do it?” For those looking to start trading the...

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