Trading the financial instrument can be very challenging for the new traders. We will teach you how to trade the forex market with great ease and high level of accuracy. Basically, there are three major types of analysis to trade the forex market successfully.
- Technical analysis
- Fundamental analysis
- Sentiment analysis
It’s in human nature that peoples tend to choose the best one. Trust me to in order to become a successful trader you must be able to do these three types analysis perfectly. These three are the complement to each other and the most vital element for the trader.
1. Technical analysis
The study of the price movement of any pair regardless of any economic event is known as the technical analysis. In the forex industry, there is a saying that “history tends to repeat itself”. Traders use the past price movement to determine the potential support and resistance level of any pair to take their trade. Professional Traders use Price Action Analysis in their technical analysis.
The study of raw price data and candlestick formation is known as the price action analysis. Candlestick confirmation in the key support and resistance level gives much more accurate trading signals. This is one of the most reliable and advanced technical analysis that the professional traders use before taking a trade. To be precise Price action traders are combining the fundamentals of technical analysis with the candlestick pattern to secure high probability trade in the forex market.
There are numerous ways of doing technical analysis in the forex market. Indicators, moving average, chart patterns etc, are all the necessary tools that traders use to do the technical analysis in the forex market. But currency trading only with technical analysis is not good enough. Traders need to look into the fundamental news also. There are three things associated with currency trading. Technical analysis is only the first part of the three. In the next segment, we will learn how to do the fundamental analysis. The technical analysis combined with fundamental analysis provided much more reliable and accurate trading signal.
2. Fundamental analysis
Fundamental analysis is the study of economic news release data. It helps the trader to get an overall picture of the country economic strength. With the help of fundamental analysis, long-term trend change and short-term trend change in any currency pair can easily be identified. Traders use major economic news release data to see if there is any potential trend reversal present in the market.
The interest rate decision of any country plays a great role in the economy of a country. If the interest rate is hike then this means that country is doing very well in the economic activities. There is the direct reflection of the interest rate hike in the forex market. For instance, we assume that USDCHF is in the downtrend for two weeks. But the Federal Reserve Bank holds a meeting and hikes their interest rate in the meeting. From this event, we can expect a major change in the trend of USD pair. The downtrend in USDCHF will end with a new possibility of an uptrend.
The unemployment claim also plays a vital role in the forex industry. A positive data in unemployment claim refer that the job sector of the country is doing pretty well in an affording new employee which means the better economy for the country. If the number of unemployment claims rises then it means there are no available jobs for the country people.
People should be very cautious while trading the news. Even the professional trader burns themselves while trading with the news. Like we said earlier, fundamental analysis is just a part of trading. Technical analysis should be used while trading the news .Some professional traders refer the fundamental analysis as the study of the macroeconomics of the country. Macroeconomic data are best analyzed with the interest rate and unemployment claim of the country. Once the traders get the gist of the fundamental analysis they try to incorporate their result with the technical analysis for the better trading result.
The change in the interest rate brings two major changes in the economy of a country. If the interest rate increase then investor are more cautious about their investment since they need to pay more for their borrowed money to the bank. This phenomenon is also a clear reflection of good economy of a country. On the contrary, when the interest rate is decreased people tend to borrow money with less interest which clearly states that the economy is not doing well. To be precise the second impact of interest rate change, lies is in the long-term borrowing tendency. Since the investor is required to pay less for their borrowed money, they spend a considerable amount of time in repaying their debts.
Government cuts down interest rate in order to expand employment and entrepreneurship opportunities in the country. The inflation rate and the employment rate increase with the cut down of interest rate of any country.
GDP or Gross Domestic Product data is the direct reflection of the overall economy of a country. It brings the major movement in the currency pair and has long term effect. On the contrary, the CPI or consumer price index data acts as a leading indicator of the price movement. Better data refers to the better economy which means traders can hold their current position in favor of the good news for the prolonged period.
3. Sentiment analysis
This is the last thing that traders need to know to complete his trading arsenal inventory. Trading with the market sentiment requires time and it’s something that we can’t learn by reading the books. It gradually develops among the trader by the course of time. Every single trader trades the market in their own way. Their technical and fundamental analysis are totally different from one another. You might be thinking that sentiment analysis is not required in forex trading. But if you thinking so then you are totally wrong. For instance, your technical analysis and fundamental analysis suggest that the USD will be stronger for the next week. But the market sentiments remain bearish on the USD which ultimately weakens the USD in the upcoming week. This problem is more common to retail traders. Many best trading setups are often thrown away due to the different sentiment of the forex market.
“So how do we learn this sentiment analysis?” The simple answer is – You can’t learn the market sentiment. All the professional traders who are successfully trading different currency pairs have developed a unique way to determine the market sentiment. Over the period of time with great perseverance and dedication, you will also learn how to do the sentiment analysis. It’s more like seek sense that you will develop in your trading career.