There are three methods used to analyse the Forex market, although a lot of traders may lean more on one method, THEY ARE ALL IMPORTANT!
These methods are:
3. Sentiment Analysis
In a nutshell technical analysis is the process of forecasting the direction of price movement through the study of past market data.
“History tends to repeat itself“ a common phrase we often hear, well that is the whole idea behind technical analysis, for instance if the price of a currency pair was held at a certain Support or Resistance level traders will keep an eye out for these levels and base their trades around that historical price level thus causing the price to move accordingly.
One of the advantages of Technical Analysis is that it uses charts a visual representation of previous price action, this is probably the easiest way to analyse price data. Analyzing a chart also makes it easier to spot trends and patterns in price. One interesting thing about technical analysis is that because so many traders rely on technical analysis more often than not these price patterns and indicators become self fulfilling.
Fundamental Analysis is the method of analyzing the markets by understanding how economic, social and geopolitical events affect the market, by affecting the supply and demand of a certain currency. For example there would be more demand for a currency from a country with a strengthening economy and as a result the price of that particular currency will increase, and that is why it is VERY important to keep an eye on the central banks of the countries of which the currencies you are looking at are from. The main difference between Technical Analysis and Fundamental Analysis is that technical analysis looks at the past to determine where price will go in the future, and fundamental analysis looks at how current and future economic, social and geopolitical events will affect the price. Using fundamental analysis alone is difficult as it makes it hard to place entries into the market and exits back out, however the fundamentals are what drive price action and for that reason it is very important to never ignore the fundamentals. Using Technical analysis alone can be disastrous for a trader as it is comparable to driving a car using the rear-view mirrors, this is because Technical analysis looks at past price action instead of what is ahead. It is Important to use both Fundamental and Technical Analysis in order to be consistently profitable.
Market sentiment analysis is the process of analyzing the general feeling or tone of a market, or its collective psychology, by studying the activity and price movement of the currency pair. For example, rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment. As a trader, it is important to take all this into consideration. You need to perform Sentiment analysis combined with the other methods of analysis.