TYPES OF FOREX ANALYSIS

Well say no more friends because here is where your journey as a forex trader begins…

This is your last chance to turn back…

Take the red pill, forget everything, and we’ll take you back to where you were before.

You can go back to living your average life in your 9-5 job and work for someone else for the rest of your life…

OR…

You can take the green pill, which is fully loaded with the dollar extract, and learn how you can make money for yourself in the most active market in the world, simply by using a little brain power.

Just remember, your education will never stop. Even after you graduate from the Pips Akademy, you must constantly pursue as much knowledge as you can, so that you can become a true FOREX MASTER! The learning never ends!

Are you ready to make that commitment?

Now pop that green pill in, wash it down with some delicious chocolate milk, and grab your lunchbox… the Pips Akademy is now in session!

Note: the green pill was made with a brainwashing serum. You will now obey everything that we tell you to do! Mwuahahaha!

Three Types of Forex Market Analysis

To begin, let’s look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of forex market analysis:

1. Technical Analysis
2. Fundamental Analysis
3. Sentiment Analysis

There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know all three.

It’s kind of like standing on a three-legged stool – if one of the legs is weak, the stool will break under your weight and you’ll fall flat on your face. The same holds true in trading. If your analysis on any of the three types of trading is weak and you ignore it, there’s a good chance that it will cause you to lose out on your trade!

Technical Analysis

Technical analysis is the framework in which forex traders study price movement.

The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.

The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price. If price reflects all the information that is out there, then price action is all one would really need to make a trade.

Now, have you ever heard the old adage, “History tends to repeat itself“?

Well, that’s basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before.

In the world of currency trading, when someone says technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data!

You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.

What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.

As more and more forex traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets.

You should know though that technical analysis is VERY subjective.

Just because Ralph and Joseph are looking at the exact same currency chart setup or indicators doesn’t mean that they will come up with the same idea of where price may be headed.

The important thing is that you understand the concepts under technical analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci.

Now we know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like ‘Fibonacci’. I can never learn this stuff!”

Don’t worry yourself too much. After you’re done with the Pips Akademy, you too will be just as… uhmmm… “smart” as us.

By the way, do you feel that green pill kicking in yet? Bark like a dog!

Fundamental Analysis

Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset. If you think about it, this makes a whole lot of sense! Just like in your Economics 101 class, it is supply and demand that determines price, or in our case, the currency exchange rate.

Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.

In other words, you have to look at different factors to determine whose economy is rockin’ like a Taylor Swift song, and whose economy sucks. You have to understand the reasons of why and how certain events like an increase in the unemployment rate affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.

The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen. The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.

In a nutshell, this is what fundamental analysis is:

For example, let’s say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation.

Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will likely increase.

Later on in the course, you will learn which economic data points tends to drive currency prices, and why they do so. You will know who the Fed Chairman is and how retail sales data reflects the economy. You’ll be spitting out interest rates like baseball statistics.

But for now, just know that fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook. It’s going to be awesome, we promise!

Sentiment Analysis

Earlier, we said that price action should theoretically reflect all available market information. Unfortunately for us forex traders, it isn’t that simple. The forex markets do not simply reflect all of the information out there because traders will all just act the same way. Of course, that isn’t how things work.

This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does. The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.

Kidding aside, the market basically represents what all traders – you, Pipcrawler, or Celine from the donut shop – feel about the market. Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there.

The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the forex markets in your favor. Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs –George Soros or Goldman Sachs!).

As a trader, you have to take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish, and you decide how you want to incorporate your perception of market sentiment into your trading strategy. If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!

Being able to gauge market sentiment aka sentiment analysis can be an important tool in your toolbox. Later on in school, we’ll teach you how to analyze currency market sentiment and use it to your advantage, like Jedi mind tricks.