Most Common Types of Forex Market Analysis
Fundamental Analysis
Forex fundamentals center mostly around currency interest rates. This is based on the fact that interest rates have a considerable influence on the forex market. Other fundamental factors include such as gross domestic product, inflation, manufacturing, economic growth activity, and others. However, whether another fundamental data release is good or bad is less important than how the release affects the country's interest rates.
Traders reviewing fundamental releases should keep in mind how they might affect interest rate moves later in the day. When investors are in risk-seeking mode, money follows yield (the currency that offers a higher interest rate), and higher interest rates can mean more investment. When investors are in a risk-averse state, money leaves yields for safe-haven currencies.
Technical Analysis
Forex technical analysis involves reading patterns in price history to determine when and where there is a higher probability of entering the market and exiting the market. As a result, technical analysis in forex is one of the most widely used types of analysis.
Because forex is one of the largest and most liquid markets, movements on the charts of price action generally provide clues about hidden levels of supply and demand. Other patterned behavior such as which currency is trending the most can be obtained by reviewing the price chart.
Another technical study can be done through the use of indicators. Many traders prefer to use indicators because the signals are easy to read, and make forex trading simpler. Technical versus fundamental analysis in forex is a widely debated topic. There is no right answer to the question of which type of analysis is better and traders tend to adopt one, or a combination of both, in trader analysis.
Sentiment Analysis
Forex sentiment is another very popular form of analysis. When you see sentiment being overly positioned in one direction, this means most traders are already committed to that position.
Maybe this can be explained better with an example. Let's assume that a lot of traders and investors are chasing the Euro. They think the Euro will continue to rise. As people vote with their trading positions, it can be seen that the sentiment towards EUR/USD indicates the majority of traders are buyers in the currency pair.
Because traders know there is a large group of traders who have BUYED, these buyers become suppliers of future sellers. This is known because eventually, they will want to close their trade positions. This would make the EUR against the USD vulnerable to a sharp decline if these buyers turned around and sold to close the deal there.
Smarter traders will analyze retail sentiment alongside sentiment at the institutional level. Many analysts explain how a trader can analyze the Trader's Commitment (CoT) report for clues on how the institutional market is positioned and how to apply this analysis to a trader's trading analysis.
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