Types and principles of analysis in forex trading

Anticipation in forex trading is generally done by analysis. There are several ways and categories in analysis. However, the ultimate goal is to use the analysis to identify the best opportunities in trading.

Forex analysis is generally divided into two, namely technical analysis and fundamental analysis. Besides that, there are also other analyzes known by traders, namely: sentiment analysis and intermarket analysis.

Many traders focus on one type of analysis, for example, only technical analysis, but many traders also combine several analysis methods to get a more complete picture of market conditions. In essence, although the analysis category might be a lot, the final goal is to use analysis, namely to identify better trading opportunities so that later it will get a profit.

For beginners traders need to learn various ways of analyzing forex and the different characteristics of each, before starting real trading. After that, know what needs to be considered when analyzing forex in order to reach the right conclusions and support you in an effort to reap profits.

Types of Forex Analysis Methods

1. Technical Analysis

Technical Analysis is a way of analyzing forex by measuring price changes using statistical tools such as mathematical formulas and graphs. The application of technical analysis requires price charts and indicators that are examined by certain methods.

In the past, traders needed to draw a chart and perform technical analysis calculations manually. However, now the charts and technical indicators needed are integrated with the online forex trading platform, making it easier. Traders simply understand the methods of technical analysis, namely how to read charts and indicators only.

Technical analysis includes forms of price movement patterns to determine the highest probability of entry and exit. Because of the ease of interpretation and application, technical analysis is always used by almost all forex traders.

And because the forex market is the biggest and most liquid of its money turnover, price movements in the trading chart generally indicate demand and supply levels, both clearly visible and hidden.

What is clear is for example support and resistance levels, and to see hidden levels, traders use technical indicators which over time are getting more and more types. By applying technical indicators, trading signals will be easily read and make trading easier.

Examples of technical analysis: there is a trader who analyzes the USD / JPY currency pair will see a price chart on the trading platform, then the trader applies technical indicators and the trader concludes that prices on USD / JPY are experiencing bearish (price trend decreases) and trader have the opportunity to sell.

Because traders have looked at the chart and know the trend or history of price movements and indicators, the trader can draw conclusions based on the technical analysis displayed on the trading platform (eg MT4 / MT5 and c-Trader).

2. Fundamental Analysis

Fundamental analysis is a way of analyzing forex by examining price movements based on economic data and the lively news discussed on the financial market. User traders fundamental analysis will observe economic data that influence market decision makers, for example: interest rates, Gross Domestic Product (GDP), inflation, manufacturing business climate, unemployment, and others data that summarizes economic activity in a country.

In addition, news regarding political stability and security is also often highlighted to conclude whether the economy of a country is healthy or not.

The focus of fundamental analysis in the forex market is the interest rate of a central bank. However, in practice, other fundamental factors are also taken into account such as inflation, Gross Domestic Product (GDP), manufacturing business climate, and other data that summarizes economic activity in a country.

It doesn't really matter whether the release of fundamental data is good or disappointing. What needs to be considered is how it affects the outlook for the country's interest rates. If you analyze the release of a data, still look at the effect on interest rate movements.

If there is a risk appetite or a tendency to take risks, investors will enter, especially when interest rates are high. This also means that there is a new investment in the country.

Conversely, when there is risk aversion or a tendency to avoid risk, investors run their money into safe-haven currencies such as the CHF and JPY.

For example fundamental analysis for example: There is a trader who examines the fundamentals of the USD / JPY currency pair and finds that the economic conditions of the United States are better than Japan. He knew that projections for higher economic growth could encourage investors to invest more in the United States. In this situation, he can decide to buy USD against JPY.

3.Other types of Forex Analysis

Besides technical and fundamental analysis, some traders also examine other forex analysis branches: sentiment analysis and intermarket analysis.

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.

Market sentiment analysis has been used recently and is becoming popular. If you see prices moving in a certain direction, that means the majority of traders have committed to that position, or the sentiments of traders are in that position.

Sentiment of market participants can be seen with certain indicators such as the Speculative Market Sentiment Index or also the Buy / Sell Ratio. This type of forex analysis also requires its own intuition that can be formed after making deep observations and experiences in reading market moods.

Most, market sentiment analysis experts are usually people who are consistent with their own analysis and not easily affected.

For beginner traders, market sentiment analysis is an analysis that is difficult to understand because no matter how strong our instincts are about certain trades, we still cannot move the forex market as we wish.

For example, if we are very confident that JPY will be bullish, other people consider it still bearish, so we inevitably have to follow market sentiment to "play safe" hehehe. Except, if we are big players like Goldman Sachs or investor George Soros who can move the market.

Therefore, this market sentiment analysis is a kind of forex analysis that is less popular than fundamental and technical analysis. It takes a lot of experience to understand it. However, the existence of market sentiment analysis continues to be developed so that it can be applied easily.

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. Based on this knowledge, the strengthening of the Nikkei index (Japanese exchanges) can have a bullish effect on JPY, so traders expect USD / JPY to be bearish.

Forex Analysis Principles

In essence, the principle of analysis in trading (especially forex) is divided into 3, namely: understanding the factors that drive the market, knowing the market consensus, and concluding whether the market conditions are suitable for trading.

1. Understanding the factors that drive the market

One of the keys to successful trading is understanding why a movement occurs in the market. So, for example when you see prices going down, investigate why prices are falling. The driving factors can come from technical, fundamental, and other aspects such as market and intermarket sentiments.

It is also important to understand that the market driving factors at one time were always varied and there was no price movement which was only driven by one reason. The influence of these factors will also continue to change from time to time.

For example: Last week, the USD slumped against JPY as the US unemployment rate was reported to increase and there was no indication that interest rates would rise, while Japan managed to record good economic growth.

However, this week the USD strengthened again. What's wrong? By listening to forex news, traders may find that inflation data is increasing so that it supports interest rates in the near future. From the JPY side there may not be any changes in conditions, but it could also be bad news.

Another example: the US stock index continues to increase as an impact of good economic conditions. However, one time a sudden US stock index fell. Does that mean the economic conditions are deteriorating? not necessarily, there may be technical factors.

For example, the price has reached a certain psychological level which is the benchmark for investors to judge that the stock has risen too high, so that a selloff begins in order to take profits.

Because the market driving factors can change, traders are advised not to stick to the current price chart, but also the price chart at a larger timeframe. For example, even though you will trade the USD / JPY currency pair on the H1 timeframe, it is better to look at how the USD / JPY dynamics are on the H4 and Daily timeframes.

2. Knowing Market Consensus

After understanding what factors drive the market, the next step is to know the general views of market participants (consensus). It is better if you do not impose your own opinion because the one who controls the market is not your trading decision, but a lot of buyers and sellers.

The way to find out market consensus is seen from several trading analyzes. For example, in fundamental analysis, it is usually seen from the projections of economic-political health-security of a country at a time when compared to the previous period.

In technical analysis, traders can see the power of supply-demand on the price chart.

3. Conclude whether the market conditions are suitable for trading

Forex analysis does not stop as far as investigating the driving factors and market consensus, but is expected to produce a conclusion for traders about whether to trade or not. And if it is decided to trade, it must also be decided where or when the trader will open and close positions based on the trading system used.

If the market does not indicate a potential trading opportunity or the movement does not match the trading system, then do not force yourself to enter. Trade when you are absolutely sure of your trading and are sure where prices will move.

Various ways of forex analysis is an art to find out the background of price movements in the financial market. Everyone can develop different styles and methods. Even if you learn from the same person, the results are not necessarily the same.

The way your forex analysis is not necessarily the same as your own teacher. However, one thing is certain for beginner traders, which must know first how to do each type of forex analysis, before starting trading. Happy trading!