Studying the nature of something by breaking it into small parts in order to gain a better understanding of it is called analysis. Forex traders undergo the analysis process first before making any decisions to trade. This kind of analysis helps you to know what happened in the past, what is happening now and what is likely to happen in the future.
There are only three ways you can anlyse the forex market charts to come up with a final decision whether to take a trade or not and to determine where the future price will be.
In forex trading we use these three types of market analysis:
- Technical analysis
- Fundamental analysis
- Sentimental analysis
The three work hand in hand although you can choose to master one of them and concentrate on it. The fact is you need all of them.
Let’s take a quick look on each and we shall explore more on analysis as a single topic in one of our next sessions. Stay with me, there is a lot to share.
Technical analysis is the study of historical price action to identify patterns and determine probabilities of future price movements in the market through use of technical studies, indicators and analysis tools.
Technical analysis says that market has a memory and future changes will be influenced by the patterns of its behavior in the past.“History tends to repeat itself”. This means that there are higher chances of something that happened in the past to happen a gain in future.
As the market trends, it tends to leave marks and signals at certain levels and this can be reflected again when it goes through those levels again tending to do the same thing in future. For example taking in consideration the levels of support and resistance.
The way patterns performed and behaved leads to a conclusion they will continue to work well in the future.
The market either moves up and down or tends to continue in a side ways direction. As traders tend to follow these marks and signals in the market more chaos is created by the forces of demand and supply and as a result these signals become more certain and tend to be real.
So it becomes more of a self fulfilling prophesy.Technical analysis is more applicable through the points of congestions, support and resistance levels, retracement points of markets, chart patterns and the behavior of candlesticks. These can be identified through use of indicators, charts and other analysis tools.
- Technical analysts predict price movements and future market trends by studying what has occurred in the past using charts.
- They are only concerned with price movements not the reasons why they occurred.
- They identify patterns of market behavior that have been recognized in the past as significant and likely to happen a gain in future on several occasions.
Fundamental analysis is interpreting of forex market behaviors by studying different countries economies which are highly influenced by political activities, financial policies, growth rates and crisis. Here analysts are interested in the cause of market changes .
Under normal circumstances, price is determined by forces of demand and supply which are highly influenced by economic factors like inflation, employment,consumer behavior and price index, political crisis, and financial policies like the monetary policy, fiscal policy and macroeconomic policies.
When a countries economy is doing great for example with high GDP, high inflation, high employment, high consuming confidence and high purchasing power, its currency appreciates.
Basing on such, fundamentals traders are likely to buy more of the currency because they expect more yield from the appreciating currency.
For countries facing issues like political crisis, high levels of unemployment, lower inflation and lower consumer confidence, its likely to affect their currency forcing investors to keep their money in a more valuable currency selling off that currency.
Economical factors like the release of Non-Farm Employment in United States(Non-Farm Payroll), measures changes in employment strengthens the Dollar when the economy is doing well and weakens it when the economy is bad. Therefore the currency can be affected according to the news released.
All these have a great impact on exchange rates therefore its always important to know the release of such information and to follow up economic calendars to know the dates and time for release of such information before engaging in any kind of trade.
Sentimental analysis is quite different from the two analysis we have seen above, it’s all about the market feelings and emotions. As we all know the market is composed of buyers and sellers of different sizes, the market makers who are the big influence of the market the retailers and us the speculators.
Sentimental analysis is how different traders are positioning themselves in the market whether to follow the trend by buying when the market is going long or choosing to go against it.
But the truth is no matter how strong your feelings are, you have got to control them.When the market is up you buy and when it is down you sell, your single decision as a trader cannot make any change on the market small as you are.
When the market is going up / uptrend, it gives you a signal that more traders will buy resulting to the rise of price or appreciating of the currency and vice versa. As a trader you need to first confirm the mood of the market participants so that you are able to respond positively.
Buy when the market is going up and Sell when the market is going down as simple as that.
How long you should hold an open position, is a personal thing for all traders. The decision is all yours. You know what your goals are as a trader, the kind of strategy you use to trade. All this starts from what you are? and What you want? If I am to answer, this...