To be successful in FX trading, you have to be very adept at analyzing market trends. There are three main styles of FX trading analysis which include sentiment, technical and fundamental analysis. This forex tutorial is going to unearth the principles behind these analytical methods.
A trading forex tutorial on analysis methods
Fundamental analysis seeks to find the enterprise value of a financial commodity. It utilizes political, social, economic and financial factors to determine this value. These are the factors that influence a country’s economy, so factors like employment data or its GDP are critical to the fundamental analysis.
Why? They are the factors that eventually determine the value of a currency. If these factors remain favorable, then a currency’s value increases. The greenback is one of the strongest currencies on the planet because the factors mentioned above are kept favorable. Want to know more? Get a forex tutorial on this analysis method to ensure that your indices, shares, commodities or currency rates trading decisions are top notch.
The significant assumptions of the fundamental analysis
- Prices correct themselves in the long-run
- Profit can be made by buying undervalued commodities then selling them when the market price corrects itself and is favorable.
Technical analysis, on the other hand, is more focused on the events that influence trading charts. A technical analyst believes that tables hold every bit of information needed to make a sound investment decision.
Charts are also the easiest way to visualize large amounts of historical data. An analyst will use mathematical chart indicators, trends, and patterns to identify patterns in price movement. The analyst will then make investment decisions with the assumptions these patterns will repeat themselves in the future.
Major characteristics of technical analysis
- Relies on studying past price movements to project future price actions
- At its heart are patterns and trends rather than intrisic values
- A commodities market price is of utmost importance and that all market information is usually reflected by the cost of a commodity.
Sentiment analysis focuses more on the emotional and psychological states of market players to determine which percentage is bearish or bullish. Once a general consensus is reached on the sentiment running the show, an analyst will, for example, take up an opposing trading position on the assumption that the crowd is wrong.
Sentiment analysis is supposed to be applied alongside technical and fundamental analysis, which is not as easy it sounds but is very rewarding in the long run.
So which analysis style should you use?
The rule of thumb is to focus more an analysis style you feel more at home with. This will help you achieve profitability faster and ensure that you have the most fun while at it. As established on this forex tutorial all analysis methods focus on how different factors affect the market, and each can unearth valuable insights that can reap a good profit.
The final word
While the technical analysis will offer insights into price movements on the charts, a sentiment analysis will give pointers into potential bear or bull markets. The fundamental analysis will help study the economy and point out the trading direction most profitable. When all this information is taken into consideration before trading, fantastic trading opportunities will arise.