The importance of analyzing the forex market cannot be underestimated. It is the vehicle on which forex trading thrives. Without it, traders will be trading blindly and there is no saying what that will result to. In making analyses, there are different approaches that one can use. Out of the many approaches there is to analyzing the forex market, there are three basic ones. They include
In fundamental analysis, the focus is on issues like the interest rate of a currency, the GDP (Gross Domestic Product), economic growth activities, manufacturing, inflation, etc; all of which are known as economic indicators. To define fundamental analysis, it is the study economic indicators and how they can point out the market conditions. In order words, fundamental analysis is all about predicting the future of the market using the economic indicators. With this prediction, traders can act wisely to make the best of what will become.
In technical analysis, traders try to find out the most probable time and place to enter and exit a trade by studying the price history pattern. Since forex trading is all about entering and exiting position, technical analysis is of paramount importance. It is not right to enter the forex market just at any point without any map of what to expect or when to exit the position. One wrong entry or exit can make all the difference.
Just like the name implies, sentimental analysis has to do with what one feels about an ongoing position. When a vast majority of traders are committed to a particular side of a trade, it is most likely sentiment in play. For instance, when a large pool of traders buys the EUR USD currency pair, this means that these buyers have the AUS USD and are future suppliers of this pair to buyers after they must have closed out the trade. Seeing that a large pool of traders is buying into this security will attract more traders into buying. At the end of it all, they will contribute to the sharp pull back by the time they decide to sell off the AUD USD.
All these methods of analyzing the market may not work for a trader at the same time. There has been a lot of question about whether to go with fundamental or technical analyses. The best thing is to try your hand on them all and find out what works best for you.
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