EDUCATION CENTRE

14 January 2022

Different Types of Analysis in Forex Market

3 Types of market Analysis:

Technical Analysis, Fundamental Analysis, and Sentiment Analysis are the 3 main types of analysis that exist in finance and are the key drivers for traders to understand why a currency or instrument moves the way it moves. Utilizing these 3 methods of analysis will help the trader identify trends, potential reversals, and continuations.

Technical Analysis

Technical analysis is a very common practice to seek statistical trends from price movements. The easiest way to understand this type of analysis is to see it via history; as the saying goes “history repeats itself.” Traders can either use the naked eye or simple indicator tools to identify past trends and utilize this information to conclude on a current and future trend.

The goal for a trader is to identify patterns in the candle sticks or chart, using the patterns of history to seek entry and plan exit opportunities.

Pros of Technical Analysis

- Most common type of market analysis
- Easy to spot

Con of Technical Analysis

- very subjective, a pattern spotted by traders may give varying results in identifying entry and exit points

Fundamental Analysis

The second form of analysis is fundamental analysis, it is a form of market analysis based on a foundation or basis of something, this something in forex will be financial news or news in general. Traders who utilize macro and microeconomics to justify potential movements of a currency.

The initial place for fundamental analysis to start will be from the economic calendar, a schedule of dates for data releases from each country that may affect the market as a whole. In general fundamental looks at the supply and demand socially and economically, traders will use these details to predict the future movement for the currency.

One of many fundamental data releases that affects the most to set a trend for a currency will be interest rate data.

Pros of Fundamental Analysis

- May not need to spend the time to look at charts
- Focus on news
- Focus on financial statements

Con of Fundamental Analysis

- Aim at long term trade setup

Sentiment Analysis

The third form of analysis is the sentiment analysis, traders analyze the retail and institutional trader’s “feeling” towards a specific market or currency. The goal in this type of analysis is to know what the masses are voting for; which side of the market either bullish or bearish is more popular.

Market sentiment is like social media, what is popular, it will become the trend in the short term, but how long will the trend last, no one will know. It is safe to say, being on the side of the masses is like riding a wave, sooner or later the wave will disappear.

Pros of Sentiment Analysis

- Traders just need to focus on the trend – can look at candlestick body to identify the current market sentiment
- Forex market is not easily manipulated due to the high trading volume, using sentiment analysis allows traders to identify short term trends

Cons of Sentiment Analysis

- No clear indication of an entry or exit
- Not a lot of immediate data to review market sentiment of the retail market

Put all 3 forms of analysis in use:

To be a well-rounded trader it is important to use all 3 forms of analysis to identify your entry and exits on your trading plan. Here’s a glimpse on how all 3 analyses can be used:
1. Use fundamentals to spot long term trends on a currency
2. Stop entry and exit points with technical analysis such as support and resistance break-throughs or reversals
3. Use the market sentiment to confirm whether to continue on a specific trade position

Before you make your investment decisions, feel free to contact account managers at USG. USG offers 24-hour personalized client support based on your preferences and needs.

Disclaimer:

Trading Foreign Exchange Currency Pairs (FX / FOREX) and/or Contracts for Difference (CFDs) on margin carries a high level of risk to your capital. These derivatives may not be suitable for all investors.