If you want to trade forex successfully and profitably, you have to know where the price is going. And to know that, you will have to analyze the market thoroughly. In this article, I will talk about the 3 ways traders world-wide use to analyze the market, which are fundamental analysis, technical analysis, and sentimental analysis.
This is a way of trading based on economic, social and political analysis to identify the effects on supply and demand of currencies, commodities. It may seem complicated, but it is just about determining supply and demand.
Using supply and demand as an indicator of the direction of price is fundamental. The difficulty here is the analysis of the causes that affect supply and demand. That means you must pay attention to many different reasons to determine whether the economy will grow or weaken. You need to understand the cause and how an event, such as an increase in the unemployment rate, will affect a country’s economy, thereby determining its impact on the supply and demand of the country’s currency.
The theory of fundamental analysis is that if a country’s current and future economic prospects are good, its currency will rise. The better the situation, the more companies and foreign investors want to invest in that country, leading to an increase in demand for that country’s currency because investors need to buy or invest in the country’s currency.
Technical analysis is about traders learning about price movements. The principle of this theory is that one can look at past price movements to determine the current situation and possible fluctuations.
Theoretically, the reason to use technical analysis in trading is that all current market information is reflected in the price. If the price is to reflect all the outside information then the price actions are the only thing we need to trade.
Have you ever heard the famous saying: “History repeats itself”?
That is what reflects technical analysis. For example, if prices were often supported or resisted at a certain area in the past, traders would take notice of those points and often place orders based on these historical prices.
Technical analysis often looks for patterns that have been shown in the past thinking that these patterns will behave in a similar way now as it did.
In trading terms, when someone talks about technical analysis, the first thing we should think of is the chart. Technical analysis uses charts as it is the easiest way to view price data.
You can look at historical price data to identify trends and patterns, thereby looking for opportunities to trade. Besides, with the help of technical indicators, trading can be more efficient.
It should be noted that technical analysis is highly subjective, which means that the same chart but each person has a different style, based on personal opinion.
Every trader in this market has their own thoughts and views, which makes the forex market complicated and one thing for sure, the market will not go the way we want it to. Many times our view is that the USD can go up, but others take it down and place orders against us, and we can do nothing.
As a trader, you need to be mindful of everything. It’s up to you to measure how the market feels and whether this is an upturn or a downward direction. Capturing market sentiment will help you trade more successfully. You can also ignore this but note that it may be your mistake.
Those are the 3 methods to analyze the forex market when you trade. As you can see, fundamental analysis and technical analysis are way more important than the last one. Of course you can take sentiments into account, but not many traders that I know of do it. It is because emotions are usually viewed as a weakness in forex trading.