Types Of Analysis

To begin, let’s look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of market analysis:

1. Technical Analysis
2. Fundamental Analysis
3. Sentiment Analysis

It’s kind of like standing on a three-legged stool – if one of the legs is weak, the stool will break under your weight and you’ll fall flat on your face. The same holds true in trading. If your analysis on any of the three types of trading is weak and you ignore it, there’s a good chance that it will cause you to lose out on your trade!

Technical Analysis

Technical analysis is the framework in which forex traders study price movement.The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price. If price reflects all the information that is out there, then price action is all one would really need to make a trade.

Now, have you ever heard the old adage, “History tends to repeat itself“?

Well, that’s basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before.

Fundamental Analysis

Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of an asset.Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all the factors that affect supply and demand.

The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen. The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.

In a nutshell, this is what fundamental analysis is:

For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation.

Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will increase.

Sentiment Analysis

Each trader has his or her own opinion of why the market is acting the way it does.The market basically represents what all traders feel about the market. Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market.The problem is that as traders, no matter how strongly you feel about a certain trade, you can’t move the markets in your favor. Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it.

As a trader, you have to take all this into consideration. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Ultimately, it’s also up to you to find out how you want to incorporate market sentiment into your trading strategy. If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!

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