3 Types of Market Analysis You Need To Know
You’ve seen the fancy adverts of making millions from the forex market if you just follow ‘their’ system. Perhaps you’ve been burnt in the past by the many charlatans who don’t even show you real trading activity (for some of ours check out our YouTube page). But let’s say you still want to be amongst the 50 million other traders and investors out there who do consistently make money. Then the first thing you need to know if you want trade the forex market successfully is the three types of forex market analysis that every trader, investor and financier looks at every single day. Clearly if these guys are using it then every wannabe profitable forex trader needs to be too. The professionals who really know how play this game use a variety of ways to analyse and develop ideas that they then go on to trade and invest in. Here are the three most important types of forex market analysis:
- Fundamental Analysis
- Sentiment Analysis
- Technical Analysis
Many traders use all three but some only use just one or two. After all success in this game is really down to what works for the individual forex trader. The great thing about these three types of forex market analysis is that with more time spent in the markets the more you learn, even if you start out knowing absolutely nothing!
For most people, the best option is to use a combination of all three. 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 making your trading very simple.
Of course it’s important to do your due diligence on each of these types of forex analysis so let’s dig a little deeper into all three of them to see what they’re all about.
This type of analysis is mainly used by economists and traders, or investors, who hold positions for a longer period of time (months or years even). It analyses economic, social and political forces that affect how well, or not, a country, or economy, is doing.
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 they currency of that specific country which of course would send the currency rate higher as demand increases.
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 an 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 particular country’s economic outlook.
This type of analysis is probably the most subjective and most difficult one to master as there are no set rules like Fundamental Analysis (you can analyse economic data like GDP and Unemployment) or Technical Analysis (the use of chart patterns, indicators, etc). However, it’s still just as important as it analyses what the current mood in the market is from all the players in it. 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.
One way to analyse this is to see how the market reacts on different 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!
This type of analysis is by far the most popular amongst beginner traders and advanced traders alike because it’s a framework that study’s the movement of price (which is the exchange rate). It’s based on the fact historical price moves can determine future price moves because history, supposedly, tends to repeat itself.
A trader of the forex market who uses technical analysis is known as a Technical Analyst (a nice fancy title). Their job is to study the chart of an exchange rate and look for patterns and trends in order to find great trading opportunities. There are a whole host of tools they have at their disposable and some you may have already read about in this education series such as ‘Popular Market Indicators’ and ‘Forex Signals’.
The fact that technical analysis is the most popular method also makes it a self-fulfilling prophecy in the fact: ‘because everyone else is using it then I should be too’. The more traders that look at the same patterns and price levels the more that analysis manifests itself into the market. But at the end of the day it works which of course is the most important part of finding great trading opportunities in the forex market.
So there you have it, the three types of forex market analysis that are essential for successful forex trading. However, if you haven’t mastered them quite yet it’s no problem. Stick with TradeVest and we’ll show you the way!