Saturday December 31, 2016 - 14:36:58 GMT
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Basic concept of the fundamental and sentiment analysis
Fundamental analysis is the study of economic news release data. It helps the trader to get an overall picture of the country economic strength. With the help of fundamental analysis, long-term trend change and short-term trend change in any currency pair can easily be identified. Traders use major economic news release data to see if there is any potential trend reversal present in the market.
The interest rate decision of any country plays a great role in the economy of a country. If the interest rate is hike then this means that country is doing very well in the economic activities. There is the direct reflection of the interest rate hike in the forex market. For instance, we assume that USDCHF is in the downtrend for two weeks. But the Federal Reserve Bank holds a meeting and hikes their interest rate in the meeting. From this event, we can expect a major change in the trend of USD pair. The downtrend in USDCHF will end with a new possibility of an uptrend.
The unemployment claim also plays a vital role in the forex industry. A positive data in unemployment claim refer that the job sector of the country is doing pretty well in an affording new employee which means the better economy for the country. If the number of unemployment claims rises then it means there are no available jobs for the country people.
People should be very cautious while trading the news. Even the professional trader burns themselves while trading with the news. Like we said earlier, fundamental analysis is just a part of trading. Technical analysis should be used while trading the news .Some professional traders refer the fundamental analysis as the study of the macroeconomics of the country. Macroeconomic data are best analyzed with the interest rate and unemployment claim of the country. Once the traders get the gist of the fundamental analysis they try to incorporate their result with the technical analysis for the better trading result.
The change in the interest rate brings two major changes in the economy of a country. If the interest rate increase then investor are more cautious about their investment since they need to pay more for their borrowed money to the bank. This phenomenon is also a clear reflection of good economy of a country. On the contrary, when the interest rate is decreased people tend to borrow money with less interest which clearly states that the economy is not doing well. To be precise the second impact of interest rate change, lies is in the long-term borrowing tendency. Since the investor is required to pay less for their borrowed money, they spend a considerable amount of time in repaying their debts.
Government cuts down interest rate in order to expand employment and entrepreneurship opportunities in the country. The inflation rate and the employment rate increase with the cut down of interest rate of any country.
GDP or Gross Domestic Product data is the direct reflection of the overall economy of a country. It brings the major movement in the currency pair and has long term effect. On the contrary, the CPI or consumer price index data acts as a leading indicator of the price movement. Better data refers to the better economy which means traders can hold their current position in favor of the good news for a prolonged period.
Sentiment analysis and its importance
This is the last thing that traders need to know to complete his trading arsenal inventory. Trading with the market sentiment requires time and it's something that we can’t learn by reading the books. It gradually develops among the trader by the course of time. Every single trader trades the market in their own way. Their technical and fundamental analysis are totally different from one another.
You might be thinking that sentiment analysis is not required in forex trading. But if you thinking so then you are totally wrong. For instance, your technical analysis and fundamental analysis suggest that the USD will be stronger for the next week. But the market sentiments remain bearish on the USD which ultimately weakens the USD in the upcoming week. This problem is more common to retail traders. Many best trading setups are often thrown away due to the different sentiment of the forex market.
The power of market sentiment is extreme when it comes to currency trading. Your fundamental and technical analysis might give a strong bullish signal for a certain pair but if the market sentiment is bearish then the fundamental and technical analysis will be of no use. To be precise market tends to respect the trader's sentiment more than the technical and fundamental analysis. So if you truly want to become a professional forex trader then it’s imperative to know the sentiment analysis. It’s true that you will have a tough time in the very beginning for the assessment of market sentiment but if you are truly committed to your trading career then you will eventually master the art of sentiment analysis.
Summary: There are major three types of analysis in the forex market. Most of the traders focus on the technical analysis section in the forex market. But in order to trade the market profitably, you need to understand the importance of fundamental and technical analysis. As a full-time professional trader, you need to take your trading decision based on the major three types of analysis in the forex market.
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