Types of Forex analysis: Which one should you use?

Analysis in chalk drawing

There are countless ways to analyze the Forex market and make predictions. Among all those ways of analysis, these three types of Forex analysis are the most popular ones:

  • Technical analysis
  • Fundamental analysis
  • Sentiment analysis

Types of Forex analysis

We will look into all these three in detail. We will also see how you can go about learning them. Finally, we will discuss choosing a combination of these methods depending on your trading style and personality.

Types of Forex Analysis

Technical analysis

Technical analysis is the most used among the three types of forex analysis. It is based on past history. The underlying premise of technical analysis is simple. Historical price action can give you some clues to predict what will happen in the price action in the future. Based on that, a technical analyst predicts whether a market will go bullish or bearish. He also determines when to enter and exit a trade.

You probably know that Forex is the most popular, the largest and the most liquid among all the financial markets in the world. Liquidity and volatility depend on supply and demand. You can guess the hidden levels of supply and demand by looking at the price action. Then you can analyze the market in a proper way.

You can also use the available technical indicators to predict the market movement. While price action is studying the raw charts with no indicators, many traders prefer to use technical indicators. Because indicators make Forex trading more simple by giving some signals to the market movement. Many traders debate on which one is superior to technical and fundamental analysis. The debate is never-ending. The simplest solution is to choose the one which works for you. Combining both of them to create a trading plan is actually better.

Fundamental analysis

Fundamental analysis is a way of analyzing the market by studying the economic, social and political factors that affect the movement of the currency market. There are many factors that affect the market such as the currency’s interest rate, Gross Domestic Product, inflation, manufacturing, economic growth activity, etc.

A fundamental analyst should keep an eye on all the major news releases that are released in various countries. Economic news from the United States is very important. Because the  US dollar is the most traded currency in the world. There may be unexpected changes, sudden breakouts and trend reversals in the market during a news release. Traders should keep these in mind and learn some wise strategies to trade the news.

The economic calendar is a good resource to check for news releases. Many Forex related websites have a real-time economic calendar published.  An economic calendar gives information about everyday news releases and the impact that it generally makes on the market.

(Get a detailed view of fundamental analysis- interest rate, GDP, inflation, CPI, PPI, and NFP here.)

Sentiment analysis

Sentiment analysis is the third most popular type of analysis in Forex trading. When you notice a sentiment that is excessively positioned in one direction, you can understand that most of the traders are already trading in that position. So, sentiment helps decipher traders feelings towards a currency pair.

Speculative Sentiment Index (SSI) is a tool that can help traders understand the retail-market sentiment in real-time. A trader who wants to learn sentiment analysis should first learn how SSI works and how to read the sentiment data. Once you have learned that, it will be very easy to implement it in your trading strategy. Likewise, sentiment differs on each session in the forex market. 

Technical vs. Fundamental Analysis – Which one is better?

Among Forex traders, there has been a never-ending debate about which one is better among technical and fundamental analysis. You can notice such debates in lots of online discussion forums. Many beginners curiously browse through various websites and blogs to decide which type of analysis they should spend much time in learning. We are going to discuss the difference between these two types of traders.

Technical vs Fundamental Analysis

Fundamental analysis

In stock market trading, a fundamental analyst checks the economic well being of an entity without considering the movement of its price. They find out the economic health of a company by checking the company’s earnings, expenses, assets, and liabilities. If the analyst sees a growth in the company’s economic well being, he may choose to purchase the company’s stock, expecting that this trend is going to continue.

Similarly, a Forex fundamental analyst is also interested in the economy. But he looks at the whole economy of different countries. He studies the country’s inflation, trade balance, gross domestic product, growth in jobs and their central bank’s benchmark interest rate. This way, the trader analyses the relative economic health of the country and decides if he should trade the country’s currency in his upcoming trades.

Technical analysis

Technical analysis is all about studying and recognizing chart patterns in the currency charts. A trader will analyze candlestick patterns, support, and resistance and the trend. Many of the tools stock and equity traders use are also used by Forex traders to analyze the market.

Traders can also add indicators and oscillators to their price charts. Such indicators are also very similar to what stock and equity traders use. The four most common technical indicators that most of the traders use are Bollinger Bands, MACD, Relative Strength Index (RSI), and stochastic. Using such indicators makes the life of a Forex trader easier. Because they help in predicting the entry and exit points of a trade.

Most of the traders use a combination of both technical and fundamental analysis. The traders who combine both are more successful than the traders who rely on any one of them. So, rather than worrying about which one is better, it is recommended to come up with a trading plan that combines both technical and fundamental analysis.