Types of Forex Analysis
There are different methods of analysis that you could employ when anticipating trading. However, to identify good trading opportunities, you should keep it simple. Here are three common forex analysis techniques you could use to help you shape a trading strategy that best suits your trading styles: technical, sentimental, and fundamental.
This is one of the most widely used types of forex trade analysis. Using past price patterns involves determining the most probable time and place to enter or exit a trade. Forex is one of the most liquid and most significant markets whose price action movements on a chart give you clues about hidden demand and supply levels. You could also use patterned behavior on a price chart to know the strongest trending currencies.
You could also use indicators like Bollinger bands, Stochastic, Moving Averages, and Fibonacci to conduct technical analysis. These tools are easier to read.
The fundamentals in forex trade often center around the currency you are trading with. Why? Interest rates have a considerable effect on the forex market. However, it is not the only factor that has an impact on the market. Other factors such as inflation, GDP, manufacturing, and economic growth could also affect a currency interest rate in forex markets.
Hence, if you are a trader who reviews the fundamental releases, you should keep in mind how they affect the movement of future interest rates. An investor who is never afraid of risking his investment may invest more in currencies with a higher interest rate because they are likely to yield more profits.
On the other hand, if you are hesitant about placing your bet on specific currencies, it is prudent to invest in currencies that leave profits for safe-haven currencies. It would help to look at websites that offer assistance in identifying how fundamental release affects currencies’ value. You could also check out the calendar for major economic events coming up before trading.
This is another common type of analysis. It involves identifying positions that most traders commit themselves by checking how sentiments are overwhelmingly positioned in a particular direction. For example, let’s imagine that many traders invest in the Euro because they think that the currency is going higher.
Checking out popular forex markets could also give you clues on sentiments that are overwhelmingly positioned. These buyers often end up being future suppliers because they want to sell their shares and close the trade at the end of the trade. However, if this happened, currencies with the highest values, such as the US Dollar and the Euro, would have a sharp pullback.
Hence, an astute trader will analyze retail sentiments alongside sentiments at the institutional level for accurate analysis. They also analyze the Commitment of Traders report to get clues on the positioning of institutional markets and how they can implement this analysis in their trading strategies.
Application of These Types of Analysis to Your Trades
You do not need to necessarily utilize one type of analysis when trading in the forex market. You can use all three types in your analysis by:
- Using the fundamental analysis to identify long-term trends
You could do this by analyzing a country’s GDP, inflation, and interest rates to get insights into its economy and the strength of its currency. For example, if Europe began an interest rate hiking cycle, the Euro would attract investors who would then prop up the value of the Euro by buying more of the currency.
- Using technical analysis and indicators to pinpoint ideal entry points
You can do this by using indicators such as relative strength index and MACD and multiple timeframe analysis to spot ideal entries in the market
- And assessing the client sentiments before entering a trade
You can do this by observing the net number of short or long time traders or trading the difference between the net long-term and short-term movement. You need to note that retail clients often trade against existing trends, which makes client sentiment a contrarian indicator.
Hopefully, this article has given you insights into using forex analysis methods that match your trading style or personality for achieving higher profits in the forex trade.