You might be sitting here thinking, “Okay, I get it, but which is the BEST? Which analysis will make me the most money! I just want to be rich!” Slow down there, buddy.
First off, you will find people that will SWEAR by their analysis. They might show you how successful they are, or their friend is, by relying on a certain analysis, and tell you that the other analysis is worthless, and that you need to focus on one. You have to think for yourself! You can’t be swayed one way or another, and you have to use the analysis that you are most comfortable with, while taking all analysis into consideration, at least.
Let’s make sure you have all of the definitions down pal, though.
Technical analysis of forex market
So, remember: technical analysis is all about the chart, and historical data. This analysis requires studying price movement, to try and predict how a certain currency will move, in relation to how it has moved in the past.
Fundamental analysis of forex market
Fundamental analysis looks deeper at the country’s economy to find out exactly why a currency is moving a certain way, and relying on data that will help to inform you whether a certain trend will continue or reverse.
Sentiment analysis of forex market
Market sentiment analysis is all about how investors are thinking, and whether their attitude are, for the most part, bullish or bearish, and how these perceptions and emotions could mean that the market is affected.
Keep in mind the three-legged stool: all three of these can work together! You can use ALL of the data at your disposal to make the most profitable trades possible, and manage your risk accordingly because of certain aspects of your analysis.
To be a true forex trader, you HAVE to keep all three in mind.
Let’s say that you feel like rebelling against this school of thought. You’ve delved into a particular kind of analysis, and you have grown to love it more than the others. Now, you feel like it’s the only one you need, and you start disregarding the other aspects of analysis more and more. Let’s examine how this can go HORRIBLY wrong. In this example, let’s say, for instance, that you are a chart guy, and have always loved charts – and that you have grown to become a forex trader that is very focused on technical analysis in particular.
Imagine that you pulled up a GBP/USD chart, and it looks like the opportunity of the day, month, year, or lifetime. All the stars have aligned when it comes to this chart, and every indicator that you use says that this is going to go up! You start rubbing your hands, and wondering about what you are going to purchase with the profits. You feel like this is the perfect long opportunity, and you have been relying on technical analysis and it’s been working immaculately well for the past couple of weeks.
So, you purchase GBP/USD, because at the end of the day, you have your system, and this is working. You even decide to risk more money than usual, because this trade is in the bag already! You got this…right? Wrong. Did you think about the fact that one of the major banks in London decided to file for bankruptcy? Yep….a major bank, that no one thought would be in financial distress at ALL, has just made global headlines for filing bankruptcy. You just noticed that GBP/USD has taken a 150-pip dive out of nowhere. Everyone in the market is bearish when it comes to Britain, and they couldn’t care less about the chart at this point.
You were plotting on what to purchase, and now you are watching your money go down the drain because you decided to analyze one way, and thought that it was okay to ignore market sentiment analysis, even though everyone feels like the market is going in an opposite direction. You get so upset that you destroy your laptop, and your girlfriend leaves you for a forex trader that is more successful than you!
Okay, okay…maybe this was exaggerated. Even if it was, we hope that it drove the point home. One type of analysis isn’t enough – a comprehensive analysis is important!
We are going to delve a little bit deeper into the market, the patterns and dynamics behind price action, and really analyzing on a closer level. You will learn much more technical aspects of trading, including the Elliot Wave theory, pivot points, candlestick patterns, and much more. You’ll learn about lagging and leading indicators, as well. You will be learning simultaneously about both fundamental analysis and and market sentiment analysis.
Ultimately, remember this – combine all of the analysis, and this will result in you being the best trader you can possibly be !