There are different ways to analyze movements in the foreign exchange market and predict how price action will fare in the future. These methods have their own merits and are helpful in determining setups with greater probability of winning. Which method you use depends on your knowledge and preference but you can also decide to combine the three types of forex trading analysis.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
In line with this, fundamental analysis takes a look at supply and demand factors based on monetary policy and interest rates. Bear in mind that a country's central bank is in charge of monetary policy setting and they could control the amount of cash in circulation. As such, they are partly responsible for affecting the value of the currency. Political and environmental factors also play a role in fundamental analysis, as these also affect economic performance later on.
The second kind of forex trading analysis is known as technical analysis. This has to do with watching previous price action in predicting future price movements. In particular, technical traders take a look at chart patterns and candlestick formations top redict if price will rise or fall.
On top of that, technical chart indicators are also used in technical analysis. This includes leading and lagging indicators, such as moving averages or stochastic, which can be combined to predict market tops and bottoms. Inflection points or support and resistance levels also play a role in technical analysis.
The third kind of forex trading analysis is sentiment analysis. With this method, a trader takes a look at how bullish or bearish markets are. It also involves looking at risk appetite, which is a gauge of how risk-hungry or risk-averse traders are.
When risk is on, market participants usually go for higher-yielding currencies. When risk is off, traders usually buy up lower-yielding currencies such as the dollar and the yen. The Commitment of Traders report is a good gauge of market sentiment as well since it shows how large speculators and retail traders are positioned for some currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
First, there's fundamental analysis. This kind of analysis takes a look at economic reports in order to forecast if a currency is in for appreciation or depreciation. Good economic performance reflected in strong figures typically results to appreciation and poor economic performance shown by weak figures leads to depreciation.
In line with this, fundamental analysis takes a look at supply and demand factors based on monetary policy and interest rates. Bear in mind that a country's central bank is in charge of monetary policy setting and they could control the amount of cash in circulation. As such, they are partly responsible for affecting the value of the currency. Political and environmental factors also play a role in fundamental analysis, as these also affect economic performance later on.
The second kind of forex trading analysis is known as technical analysis. This has to do with watching previous price action in predicting future price movements. In particular, technical traders take a look at chart patterns and candlestick formations top redict if price will rise or fall.
On top of that, technical chart indicators are also used in technical analysis. This includes leading and lagging indicators, such as moving averages or stochastic, which can be combined to predict market tops and bottoms. Inflection points or support and resistance levels also play a role in technical analysis.
The third kind of forex trading analysis is sentiment analysis. With this method, a trader takes a look at how bullish or bearish markets are. It also involves looking at risk appetite, which is a gauge of how risk-hungry or risk-averse traders are.
When risk is on, market participants usually go for higher-yielding currencies. When risk is off, traders usually buy up lower-yielding currencies such as the dollar and the yen. The Commitment of Traders report is a good gauge of market sentiment as well since it shows how large speculators and retail traders are positioned for some currencies.
Using these three kinds of analysis all together can help improve the probability of catching profitable trades as it would allow the trader to have a more comprehensive look at the markets.
No comments:
Post a Comment