The best type of analysis in forex trading


In the previous post, we discussed the types and principles of analysis in forex trading. Where we know that forex analysis is generally divided into two, namely technical analysis and fundamental analysis. 

Besides that, there are also other known by traders, namely: sentiment analysis and intermarket analysis. Then, if there is a question, which is the best fundamental, technical, market sentiment, and intermarket analysis?

The answer is quite surprising because all types of analysis are in fact complementary, so everything is very much needed to analyze the market. Although many think that only the most important technical and fundamental analysis, is that right?

The debate about the best type of forex analysis always revolves around fundamental and technical. Supporters of technical analysis assume that profits can only be achieved by observing price charts only while proponents of fundamental analysis argue that price movements are caused by changing economic conditions.

It is true that these two analyzes are the most important, but there is another analysis that should be used as a reference, namely the analysis of sentiments and intermarket.

To uncover the differences and determine where the best forex analysis is, let's discuss more about some of the understanding of the analysis.

Technical Analysis

Technical Analysis observes price movements that appear on the price chart. Because it is applied with the principle that price movements are always repetitive, then the purpose of this analysis is to recognize the pattern of past price movements as a basis for future price estimates and to find the ideal open position moment.

To perfect the analysis on the price chart, traders usually use tools in the form of technical indicators and certain observation methods.

Fundamental Analysis

Fundamental Analysis examines the potential of price movements of various factors that can affect the rise and fall of currency values, such as the release of economic data related to a country's economic conditions and central bank policies.

Gross Domestic Product, inflation, unemployment, and several events, such as natural disasters and political upheaval are also part of fundamental factors. For example, traders who conduct fundamental analysis of USD / JPY will base their observations on interest rate policies and also release high-impact economic data from the United States and Japan.

The existence of important events such as elections or even conflicts that threaten the stability of the United States and Japan, is also an important consideration in conducting a fundamental analysis of the USD / JPY.

Sentiment Analysis 

Sentiment Analysis is a way of analyzing forex by observing the mutual agreement "consensus" of market participants to anticipate price movements.

In general, there are four sentiments that can arise in financial markets, namely bullish sentiment, bearish sentiment, appetite risk, and avoidance risk (neutral).

Bullish is the tendency of the majority of market players to expect price movements to rise, Bearish is the tendency of the majority of market players to predict prices will decline, and Neutral means that price movements are expected to be stable or flat, in this case traders tend to avoid markets due to lack of catalysts or high uncertainty, so prices held in the range of limited movements (sideways market).

Intermarket Analysis

Intermarket Analysis is a way of analyzing forex by examining the relationships and interactions between the four groups of major financial assets, namely stocks, bonds, commodities, and currencies.

For example, it is known that there is a positive correlation between the stock index and the exchange rate of a country's currency.

From the reviews above, then the conclusion: technical analysis deals with price analysis on the chart, and fundamental analysis observes data and events that can affect price movements. 

Meanwhile, market sentiment analysis measures the consensus of traders about their tendency to buy, sell, or even not enter the market, and intermarket analysis between relationships and interactions between the financial assets.


Determining the Best Types of Forex Analysis

So, which type of forex analysis is best to use? Questions like this often cross and we assume if the 'flow' of traders can be divided based on the type of analysis used, without really understanding that all types of forex analysis are not conflicting, but rather complementary.

Technically visualizing sentiments, Fundamental shapes sentiments, and applies a framework to create a trading plan with sentiment analysis of market and intermarket. Therefore, it is quite impossible to use only one type of analysis in forex trading. Don't believe? Look at the example here:

'If you only use technical analysis', then you will only pay attention to the movement of GBP / USD on the chart without taking into account other factors. Let's say you find a very good Buy trading opportunity based on technical signals, then install a Buy Order with great confidence that the price will move according to the technical projection.

However, what happens when the British central bank announces sudden cuts in interest rates? The market will panic and sell the GBP / USD that you bought. So, even if technical signals can help predict where the next price movement will go, this type of analysis will not be able to overcome the fundamental impact that appears unexpectedly and can move prices significantly.

In a situation like this, traders who do not ignore the fundamentals will choose not to order, or just enter the market after the announcement of the central bank.

'If you only use fundamental analysis', then you only know the situation that affects price movements without knowing how to place the position of the Order at the most ideal price level and where to place the Close Position target so that trading continues to benefit.

Knowing the Open and Close Position strategy is very important because it can get the maximum profit expected. It's useless to know where the price will move from a fundamental point of view, if you don't know what price Buy and Sell should be done.

'If you only use market and intermarket sentiment analysis', then the outlook on price direction and potential Buy and Sell positions will be even more blurred.

We will only know the tendency of traders who behave Bullish, Bearish, or Neutral and the comparison with other assets. And that's not too reliable because the forex traders' consensus is taken not to represent all the market participants involved.

So it can be concluded that there is no best type of forex analysis and all complement each other, so it is like a four-legged chair that needs all its legs to stand still, you cannot arbitrarily eliminate one type of forex analysis if you do not want to fall into the brink of failure.

The best solution is to combine technical, fundamental, market sentiment and intermarket analysis. If we are lazy to learn and only want a shortcut by understanding only one type of analysis, then we have difficulty being a consistent forex trader.

To use a combination of several types of forex analysis does not always mean having to put everything in the same portion. This is indeed possible, but it is less favored by traders who tend to favor one type of analysis.

Believe it or not, traders who are leaning towards certain types of analysis are usually easier to find, than those who are neutral and can treat technical, fundamental, and market / intermarket sentiments with the same priority. Focusing on one type of analysis is not wrong because in fact there are many experienced traders who take that step.

The difference between professionals and beginners in this case is that they know if their type of analysis cannot stand alone and still use other analytical methods to complete their trading. Meanwhile, amateurs easily override other analyzes when choosing their favorite type of analysis.

The main key to combining all types of forex analysis is prioritizing which ones you can master, then using two other analyzes as complementary or confirmation. Fundamental traders usually rely on fundamental factors to estimate the direction of prices, then use basic technical analysis such as Support and Resistance and indicators to find ideal open positions.

Analysis of market and intermarket sentiments in this case can be used as confirmation that further strengthens the Entry signal. Meanwhile, technical traders are always watching the chart both to predict price movements and to open and close positions.

However, they are also not blind to data releases or important fundamental news that can move prices beyond technical predictions. To anticipate such things, they at least pay attention to the forex calendar to find out and anticipate the arrival of the big impact data.

So that way, all types of analysis in forex are needed even though the number of servings is different.