There are many ways in which a trader can analyse the forex market for potential trading opportunities. Whilst many traders only focus on one aspect of analysis, I find it much better to combine elements of each type of forex analysis. This way I can be sure that I have all angles covered when making my trading decisions. If there is conflicting information from each analysis, this can tell me that perhaps the trade position I was considering is not worth taking. In this forex analysis article, we will briefly touch upon some of the most important methods of forex analysis.
Forex Technical Analysis
This is perhaps the most popular method of analysing the forex market for trading signals. Technical analysis is when you load indicators on your charts in order to try and identify the current market conditions and look for entry/exit points based upon the information displayed by the indicators.
Popular forex trading indicators include moving averages, MACD, Bollinger bands, stochastics oscillator, RSI, CCI, Parabolic SAR, ADX and Ichimoku Kinko Hyo. The MetaTrader online trading platform has an abundance of built in indicators for conducting in-depth technical analysis.
Forex Technical Analysis Advantages
- Identify market trends
- Identify ranging markets
- Ideas for entry/exit points
- Many technical indicators freely available
- Easy to use and interpret
Forex Technical Analysis Disadvantages
- Lagging signals
- Conflicting information
- Different signals on different chart time frames
Forex Fundamental Analysis
Fundamental analysis in the forex market is analysing economic factors that can affect the prices of currencies. It is usually conducted by studying news releases that can impact market movements.
The primary way to use fundamental analysis when forex trading is to follow the latest and upcoming news releases on an economic calendar.
There can be big market moves following news releases, especially those which have a high impact rating. If you are aware of pending news releases, you can either avoid potential market volatility or implement a news trading strategy.
Forex Fundamental Analysis Advantages
- Keep up to date with latest market news
- Avoid volatile markets
- Implement a forex news trading strategy
- See what the big market participants may be doing
Forex Fundamental Analysis Disadvantages
- Forecasted and actual results can differ
- Can be difficult for beginners to interpret
- Not all trading platforms include an economic calendar
- Some news data requires a subscription fee
Forex Price Action Analysis
Price action analysis involves using the prices of currencies to assist with trading decisions. Forex traders can use price action analysis to help determine trade entry, trade exit, stop loss and take profit levels.
One of the key things to consider with price action analysis is that it tells you exactly what the current market conditions are whereas some other forms of analysis can only tell you what has happened historically.
Forex Price Action Analysis Advantages
- Real time market analysis
- Prices followed by traders around the world
- Various ways to conduct price action analysis
- Can be used to confirm entry/exit signals.
Forex Price Action Analysis Disadvantages
- Can be open to interpretation
- Does require studying to understand price action patterns
Forex Sentiment Analysis
When you analyse the forex market sentiment, you are looking at what the other market participants are doing. A sentiment analysis should provide data on positions of other traders including the volume of these positions.
Let’s take retail traders as an example. If the majority of retail traders are buying a currency pair then the sentiment is said to be a buying sentiment. If the majority of traders were selling a currency pair then the sentiment would be considered a selling sentiment.
I believe it is very powerful to have sentiment information available. I sometimes say it is like playing cards whilst being able to see the hands of the other players. If you know what everyone else is doing, you can plan your trades accordingly.
A popular way to trade based on sentiment analysis is called contrarian trading. This is when you look for an extreme in the market sentiment and then go against it. This is often an over looked forex analysis tool that I personally feel everyone should be using whatever their trading strategy.
Forex Sentiment Analysis Advantages
- Can be used for contrarian trading strategies
- Gives an edge that is often not considered
- Shows what other traders are doing
Forex Sentiment Analysis Disadvantages
- Sentiment data may be limited to retail traders
- Data from big players not readily available
- Requires specific sentiment tools – like the forex market sentiment indicator.
Forex Market Analysis Conclusion
Hopefully you now have a clear understanding on the different types of forex market analysis and how you can implement them within your own trading strategies. I would personally prefer to combine all types of analysis to confirm my trading signals. You should trade forex in a way that suits your own individual style, needs and goals.
The methods of implementing the forex market analysis into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
If you would like to practice the different methods of market analysis, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.