Best ways to Analyze Forex

Most likely we are never going to see consensus among traders on the subject of “Which types of analysis is the best”.

Before you jump into educating yourself on Forex trading, you should have at least a vague idea of the three types of analysis. These being Fundamental, Sentiment and Technical Analysis. If you would like to explore our in-depth breakdown of each, please read the articles we have for you in this blog.

Below we will create a comparison to help you understand the basics.

Which type of analysis is better?

If you are looking for a straight answer, you are out of luck. To get to the right answer for yourself, as each trader will have their own preferences, go through the questions and points below.

Forex Analysis
Source: Peshkova | Shutterstock.com

Fundamental Analysis Overview

Here we will be dealing with economic factors. The factors in place are issued by government regulators and agencies within specific time periods.  Some will have a stronger influence on the markets and longer-lasting (for example interest rates), others will have weaker and shorter lasting effects.

In the screenshots below we can see two examples of “Economic (fundamental) Calendars”. You can find many such calendars for free online.

They will include the time when the event (could be speech, could be economic report etc) will take place, the currency that will affect, the impact that it has on that currency, the Previous Reading (if measured by numbers), the Forecast (what experts expect the results to be) and the Actual number.

Forex calendar
Source: forexfactory
Forex calendar investing.com
Source: investing.com

Sentiment Analysis Overview

Sentiment Analysis deals with this exact phenomenon – It studies what part of the traders are bullish (optimistic about the given asset or instrument, believing that the price will surge) and what part are bearish (pessimistic hence believe the price will drop).

An example of Sentiment analysis is the myfxbook’s “Community Outlook” indicator.

sentiment analysis myfxbook
Source: myfxbook

The information here is presented to show the breakdown of the direction traders are going, long/short and the volumes involved within each. For example, as seen above EURUSD is currently the most traded market and participants believe that the price should continue to fall, as the Community Trend is bearish (red).

sentiment analysis long or short
Source: myfxbook

As we can see from the details, 85% of the traders are holding short positions.

Technical Analysis Overview

Technical analysis uses past price action patterns, volumes and technical indicators, with the aim to determine the future direction of price.

The idea is that price action represents the trader’s emotions, fears, beliefs and hopes. Since human behaviour can be repetitive, traders usually look back at price action patterns from the past, in hopes they will move in a similar fashion in the future.

If you are looking for a more detailed article on Technical Analysis please refer to the technical analysis article.

Example

In this example, we will utilize the power of all three analysis in order to demonstrate the power of each of them. Keep in mind you might be using each type of analysis independent from each other.

Fundamental Analysis

On the 4th of April 2013 the Bank Of Japan announced that it will start buying ¥60 to ¥70 trillion bonds a year following its quantitative easing program.

That had an immediate effect on the financial markets where the Japanese Yen weakened dramatically. The unemployment rate dropped from 4% (in the last quarter of 2012) to 3.7% in the first quarter of the following year. That was about the time when the Yen was trading around 25% lower versus the US dollar.

Sentiment Analysis

The move made by the Bank of Japan created a very negative sentiment among the traders when it came to the Japanese Yen. Traders would anticipate the Yen to weaken and that saw the general flow of sentiment was following a weaker direction.

In the dedicated article on Sentiment Analysis the correlation between Sentiment and Fundamental analysis details this. A crucial fundamental event that significant influence on the market, and would tip the scales/sentiment in one direction or another.

So now we have negative sentiment, for fundamental reasons to believe the yen could lose value against other major currencies.

Technical Analysis

After looking at the fundamentals and sentiment, it is time to use technical analysis to pinpoint potential entries.

The D1 chart below provided one of the best buy opportunities with a Triangular Pattern. One of the strongest and most reliable chart patterns in technical analysis. (If you are keen to learn more about trading patterns, we at Intent Trading is can assist)

technical analysis triangle
Technical Analysis – Triangle

So there it is all three types of analysis, utilized at the same time, creating potential entry signals. Which one do you like the most? Which one fits your trading style and personality?

All these questions will help you find your way on the quest of building up yourself as a trader.

Good luck!

 

 


 

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