When we talk
about Forex analysis, we must learn
to differentiate the different types of analysis, and understand their
particularities and their complementarities.
There are 3
main types of Forex market analysis:
* Technical
Analysis, which is essentially based on the study of charts.
*
Fundamental Analysis, which studies the macroeconomic context and statistics.
*
Sentimental Analysis, which focuses on the analysis of market psychology.
Technical analysis
Technical
analysis is the daily bread of the trader. Some traders use it more than
others, but it remains an indispensable part of any short-term investor's job.
Technical
analysis starts from the premise that past behaviour is likely to recur.
More concretely,
technical analysis brings together a set of methods that make it possible to
analyse the charts and draw conclusions.
There are
two main areas within technical analysis, which one of them is graphical
analysis, which is directly concerned with movements in gross prices, and the
other, indicators, which are based on the evolution of prices. Prices restated
via mathematical formulas, and presented in the form of curves independent of
prices on the trading platform.
For
beginners, technical analysis can
seem off-putting and complicated. It is true that this field has its own
jargon, and that the methods and indicators are counted by the hundreds, as you
will be able to see it later in this training.
Mastering a
few indicators and techniques is more than enough, as we explain and teach on
this website.
It should
also be understood that technical
analysis is subject to the phenomenon of "self-realization": If
all traders use the same techniques and indicators, everyone sees the same
signals, and therefore everyone takes the same positions, and the market is
thus moving in the direction described by the analysis ...
We must
therefore avoid originality in terms of technical
analysis, and focus instead on old and widely used techniques and
indicators.
Fundamental analysis
Fundamental analysis therefore studies the macroeconomic
context to predict the evolution of a currency pair. For example, for EUR /
USD, we will study the economic situation in Europe and the United States.
Put simply,
a strong US economy should benefit the dollar, and a strong European economy
should benefit the Euro, but in the context of currency pairs, this is a
benchmarking study that needs to be done.
In the case
of EUR / USD, the question to ask is therefore: Which of the US economy or the
European economy is in better health?
If the
European economy is COMPARATIVELY healthier than the US economy, EUR / USD
should grow, and vice versa if the US economy is healthier than the European
economy.
And to
"measure" the savings, there are a host of economic indicators to
watch every day: Unemployment rate, GDP, confidence indices, manufacturing
indices, etc. All these indicators and their publication times are listed in
the many economic calendar websites.
It is also
necessary to know how to differentiate the short-term fundamental analysis,
which concerns above all the “hot” reactions of currency pairs to statistics,
and the medium-long term fundamental
analysis, which seeks to depict a background context. which allows
conclusions to be drawn in the longer term.
One might
therefore believe that it is necessary to have solid notions of economics and
finance to master fundamental analysis,
but this is not the case. As a trader, you don't have to master all of the
macroeconomic concepts, but just know what types of news are likely to impact
the market and when.
How to combine technical analysis and
fundamental analysis?
In daily
practice, a trader mainly uses technical
analysis. Fundamental analysis intervenes however at several levels:
* To know the general basic sentiment:
Macroeconomic background bearish, bullish or neutral? If the macroeconomic
background is bullish, it will be better to look for bullish opportunities, and
bearish opportunities if the background is bearish.
* To know when risky news will be published,
and to be ready in the event of highly volatile movements. We can thus choose
to try to take advantage of strong potential movements, or on the contrary to
ensure to exit the market during periods of risk.
In our next
lesson, we will look at introduction to
forex technical analysis.
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