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Three major types of analysis and its importance in the forex market.

The forex trading is based on three major types of analysis. Most of the professional traders use technical, fundamental and sentiment analysis before they execute any trade in the market. Technical analysis is the study of the raw price data with help different trading tools like indicators and EAs. Fundamental analysis is the study of the economic performance of the country over the given period of time. The third type of analysis is the sentiment analysis and it is often considered to be the most advanced type of analysis in the forex market.

Technical analysis is the most common form of analysis in the forex market. Starting from the rookie trader ending with the experts, all of them use technical analysis to execute their orders in the market. Most of the traders use different time frames and indicators in order to find high probability trading setups in the market. In order to master the art of technical analysis you have to grow through all the basic elements of the forex market and make sure that you have a solid understanding of every single topic.

The power of technical analysis is extreme in the forex market. Without having a strong foundation in the basics of forex market you can’t expect to learn the technical analysis section properly. Support and resistance levels are considered to be the most important levels in the forex market. Professional traders use the technical analysis to identify the potential support and resistance levels in the market. They use the horizontal lines, trend lines and moving average to filter the best trading zones in the market.

There are many traders in the financial industry who are making a consistent profit by the virtue of their technical foundation in the forex market. Yet they incur a heavy loss in the financial market in the event of the major economic news releases in the market. Support and resistance levels are not a fixed levels in the market. They are frequently broken by extreme volatile movement of the currency pairs. If they had a solid foundation in fundamental analysis then their trading performance would have been far better.

Technical analysis is the prime arsenal that every single trader have in their trading arsenal. Without having a proper knowledge about the technical analysis section you will never succeed in the financial industry.

Fundamental analysis is the study of the macro and microeconomics of the country. Professional forex traders use the fundamental analysis in order to measure the economic performance of a certain country. Without having a strong knowledge about the fundamental analysis you will never understand how well a country’s economy is doing in the financial market. To be precise it will help you know the overall financial conditions of certain assets.

There are many traders in the financial industry who often trades the fundamental news releases in the market. During the event of the major news release, the market becomes extremely volatile and expert news traders make a decent amount of money by trading the news. If you are new in the world of currency trading then you should avoid news trading since trading the news requires an extreme level of skills and pin perfect execution of the trade.

Many forex traders in the financial industry often ignore the power of fundamental analysis. But to be honest, as a professional forex trader you must have a clear understanding of the major's news releases in the market since it will help you from many bad trades in the market.

Strong support level is broken during the news events

Figure: Power of fundamental analysis

In the above figure, price broke a critical support level in the market with a massive drop in the chart. Those who are trading the financial instrument based on the technical analysis would have incurred a huge loss in the market at that time. On the contrary, those who understand the fundamental analysis part would have taken shortly since the price is most likely to drop in the near-term future in the event of such bad news release.

Sentiment analysis is one of the most advanced types of analysis in the forex market. Though the fundamental and technical analysis can be learned by reading different books and seeing different tutorials but when it comes to sentiment analysis traders the word experience comes into action. Sentiment analysis helps the traders to get a clear overview about the majority of the traders in the forex market. For instance, when most of the traders are taking a short position in GBPUSD pair the market sentiment is considered to bearish.

In the eyes of professional traders, successful forex trading requires all the three types of major analysis. It’s true that you will be able to make a decent amount of profit by trading the financial instrument in the forex market but in order consider trading as your full-time business you must execute your trading orders based on three types of analysis. Best trades are those which are taken based on the three majors types of analysis in the market.

Forex trading is such a lucrative business that every single day the number of forex traders is increasing. If you truly want to become a professional trader then you must understand the importance of three major types of analysis in the market. Once you truly understand the value of these three types of analysis then you will definitely learn them. Most of the professional traders who are profitably trading the forex market have developed strong trading skills based on these three types of analysis.

 

Article was written by Dwayne Buzzell

Dwayne Buzzell

An economist, Forex trader and Forex writer.  I have a keen eye for spotting international trading trends. My Forex experience as an individual trader has been thoroughly enjoyable and has brought significant returns for myself and my clients. More on my forex website.

 

 

 

 

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