Forex Education

Type of Analysis in Forex Trading and Which Type is Best For Trading

forex-analysis-and-types-of-analysis

Examining the currency pairs to find out the direction of price movement and where the prices will go in future is known as forex analysis. All banks, financial companies, investment management firms and forex traders use analysis to find out price movement.

Most of the traders analyse forex market based on same types of analysis use in stock market that is technical analysis and fundamental analysis.

Types of Analysis

There are three types of analysis that are necessary to use in your analysis for trading.

  1. Fundamental Analysis
  2. Technical Analysis
  3. Sentimental Analysis

Fundamental Analysis

Fundamental analysis is the way to find the intrinsic value of securities and for this purpose we examine financial and economical related factors. In forex market when we analyze fundamentally we look for the factors that can effect on value of currency.

fundamental-analysis

Here we will study about main factors that play major role in currency movements.

Economic Indicators

Economic indicators play main role in currency value. These indicators are reports that released by government or private organization. These economic indicator reports release in time as given in schedule and indicates either county’s economy improves or decline.

Gross Domestic Product (GDP)

GDP is most valueable factor in country’s economy. It show the number of goods produced in country in a year.

Retail Sales

Retail sales report of a country measure the final receiving of retail stores in country. This report is measured from samples of all stores in the country.

Industrial Production

Industrial production report measures the total production of all factories, utilities and mines in a country. Trader keeps eyes on these economical reports during their trading.

Consumer Price Index (CPI)

CPI report can compare the exports of a country and measures the changes in prices of consumer goods. This factor is important because exports have directly impact on currency’s value.

Some more important economic factors release according to their schedule like as Purchasing Managers Index (PMI), Employment Cost Index (ECI) and Producer Price Index (PPI) etc. All these fundamental factors have value in analysis if properly used.

For this purpose traders get all these fundamental indicator’s schedule on economic calendar where all reports are scheduled to release.

It is not only important to see reports number but it is also important to understand why these indicator effect on currency value and how to analyze them.

Technical Analysis

Technical analysis is the analysis in which we use different methods to find pattern of price movements.

Many of the forex traders now a days focus on technical analysis and there are many ways to analyze market in technical analysis.

technical-analysis

Mostly technical analyst focus on chart patterns, candle patterns and technical indicators for analysis.

Technical Analysis Chart Patterns: These kind of charts includes horizontal and trend lines, moving averages, Fibonacci lavels to identify the price movement of a currency.

Technical Analysis Candle Patterns: These patterns includes candles high, low, open and close price and candle body to identify the behavior of buyer and sellers in the forex market.

Technical Analysis Indicators: In this category we use technical indicator to indentify the movement of price and behavior of market. These indicators provide signal to trader like as market is overbought or oversold.

An example of technical analysis is shown in image

Benefits of Technical Analysis

  • Technical analysis requires only few tools for analysis that are given in metatrader 4 (mt4) for free.
  • Technical analysis helps to find entry and exit points and gives possible direction of price movement.
  • There are many free indicator and tools available that can be used to identify the trade setup.

You can get free technical indicators and tools here.

Sentimental Analysis

We can define sentiments as what investors or traders think about specific market. In simple word you can say it’s the measure of traders in percentage that how many are in long and how many are in short positions and this type of analysis is known as sentimental analysis.

sentimental-analysis

Sentimental analysis is also useful tool for traders to understand market behavior and price action. Sentimental analysis also use in stock market.

Working of Sentimental Analysis

Traders can use sentiment indicator to observe market sentiments. If most of the traders are in negative side in this case put buy trader and same as if most of the traders are in positive side then putting sell trade is best choice.

For example you are trading in EUR USD currency pair and 85% traders are in buy it means this pair will reverse now so here sell trader is best trade. Same in other case if EUR USD price goes down and 80 to 85% traders are in sell position in this case buy trade is best choice for trade.

Conclusion

All types of analysis have its own importance and play’s important role in market analysis. As a pro trader you should learn and practice all type of analysis either its fundamental, technical or sentimental analysis.

For new traders technical analysis is the base to start their trading but to enter as a hunter in trades its necessary to learn all type of analysis.

You may also like to read the following topics.

How to Choose Best Forex Broker For Trading

What is Forex Broker and Types of Forex Brokers

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