Forex trading analysis comes in different types and forms. Though there are numerous categories of analysis, forex traders should try as much as possible to keep it simple; this helps them identify better trading opportunities. However, every trader should find out the type of analysis that is suitable for his trading style. In this piece, we will be exploring the most common techniques and ways they help you become a better trader.
Fundamental forex trading analysis is centered upon a currency’s interest rate. This is because interest rates have a significant impact on the forex market. Some other fundamental factors that affect the market include inflation, gross domestic product, economic growth activity, and manufacturing. As a trader, you must consider the effect of the fundamental news on the potential movement of interest rates. An investor in a risk-seeking mode follows currencies that offer a higher interest rate, whereas an investor with a risk-averse mindset follows currencies that offer a safe-haven. Every forex trader should try to identify the fundamental news release that affects the value of a currency.
This is a forex trading analysis that focuses on price history patterns in a bid to determine the possible time and price to enter or exit a trade. To this effect, technical analysis is one of the most sought-after forex trading analysis. Due to the liquidity in the forex market, price movement on a chart usually gives insight into the high probability supply and demand level. You can discover a strong trending currency with the help of a price chart. Other forms of technical forex trading analysis can be conducted using indicators. As a matter of fact, most traders have a flair for using indicators since they offer easily readable signals, thereby making trading more straightforward.
There has always been a debate about the best form of forex trading analysis. Fundamental or Technical? No one can actually pinpoint the best; however, whichever you wish to use, ensure you understand every detail about it. This brings us to the third type of analysis.
Forex sentiment is another commonly used forex trading analysis. If you notice sentiment significantly pointed to one direction, it means that a lot of traders have already opted into that position. For instance, if there is a large percentage of traders taking a buy position on the US dollar, they believe the currency will go higher. Having known that a large number of traders have gone long, these buyers will undoubtedly become future sellers. This is because they will eventually take profit and exit their trades. Resultantly, there will be a sharp pullback when buyers sell to exit their trades. Smart traders analyze institutional sentiment as well as retail sentiment to get a better insight.
As mentioned earlier, there is no best forex trading analysis technique. The best option to go for will be dependent on the time frame, access to information, and trading psychology. Take advantage of any of the methods above to make some cash off the forex market.