Foreign exchange Education

foreign education

Timely update the first-hand foreign exchange guidance every day
Escort daily transactions
Open a real account
<< Return

Three types of forex market analysis

There are three basic types of forex market analysis:


1. Technical Analysis

2. Fundamental Analysis

3. Sentiment Analysis


1: Technical Analysis


Technical analysis is the framework in which forex traders study price movement. The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.

The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price. If price reflects all the information that is out there, then price action is all one would really need to make a trade. Now, have you ever heard the old adage, “History tends to repeat itself“?


Well, that’s basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before.




In the world of currency trading, when someone says technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data! You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities. What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.

As more and more forex traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets. You should know though that technical analysis is VERY subjective.


Just because Ralph and Joseph are looking at the exact same currency chart setup or indicators doesn’t mean that they will come up with the same idea of where price may be headed. The important thing is that you understand the concepts under technical analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger bands, or pivot points.



2: Fundamental Analysis


Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.

You have to understand the reasons of why and how certain events like an increase in the unemployment rate affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen.


The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.


For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation. Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will likely increase


3: Sentiment Analysis


The forex markets do not simply reflect all of the information out there because traders will all just act the same way. Of course, that isn’t how things work.

This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it.


The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.


Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market. Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there.


The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the forex markets in your favor. Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs – George Soros or Goldman Sachs!).


As a trader, you have to take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Then you have to decide how you want to incorporate your perception of market sentiment into your trading strategy.