1. Fundamental analysis


This type of analysis focuses on various economic factors that influence monetary values. Some economic fundamentals include inflation, interest rates, political issues, unemployment, and GDP ...

Traders who will use fundamental analysis to identify trading opportunities, known as fundamentalists, will believe that underlying macroeconomic conditions are reflected in the value of currency.

Thus, a country with a strong economy has a stronger currency than a country with a weaker economy. These "fundamentalists" usually analyze a country's economic outlook and determine whether that country's currency will go up or down.

These traders often review major economic announcements and reports to assist them in evaluating the value of the currency involved. Major economic events are often reported on the economic calendar.

Before an economic announcement is published, top economists around the world often agree on the level of expectations for that report. Therefore, the upcoming economic report will be weighed against the consensus to determine its impact on the market.

Issuance of reports is generally classified as follows:
  • As expected - the statement was released as expected.
  • Better than expected - statement released better than expected.
  • Worse than expected - the statement was shipped worse than expected.
Interpreting whether the report has announced higher or lower consensus levels often leads to increased volatility in the market when traders quickly open and close positions. Oftentimes, the large degree of discrepancy between the consensus and the fact report released will result in broad moves in the market.

If an economic report is better than expected, it shows that the country's economic outlook is positive, which could lead to their currency appreciating against other currencies.

Conversely, if a report is worse than expected, it shows the country's economic outlook is negative, possibly causing their currency to depreciate.

Most fundamental traders believe that a report at or near-consensus usually only results in a neutral effect.

2. Technical analysis


This type of analysis involves assessing past market behavior with the goal of predicting the future direction of a currency's price. TA followers will rely on different systems and concepts to assist them in understanding the historical course of the world as well as identifying trading opportunities.

Some of the techniques and tools used to perform technical analysis include candlestick chart patterns, support and resistance levels, trend lines, and indicators such as moving averages and Fibonacci.

Technical traders believe in three essential assumptions:

One, they appreciate the superiority of price action. These traders assume that all of the underlying factors that can influence the value of a currency have been demonstrated in the movements seen in the market. Therefore, technical analysts only focus on the price action shown on the chart and do not spend time analyzing the cause of the movements.

Second, technical traders emphasize that the movement of prices is trending. The three main types of the trend are bullish, bearish, and sideways (prices fluctuate without moving in any specified direction).

After a trend begins, technical traders believe that price action will usually follow it before establishing another trend. Hence, the typical technical analyst only trades in the direction of the prevailing market trend. This is the basis of the phrase "the trend is to be a friend of the trader".

The final assumption is that history tends to repeat itself. Technical traders assert that market movements form patterns that are likely to reappear in the future. Since these movements are orderly, systematic, and predictable, they allow traders to predict the direction of price with a certain precision.

3. Sentiment analysis


This is the third type of analysis. It involves analyzing the participants' primary sentiment or attitudes about the market.

Every market participant has their own feelings about the behavior of currency prices. It is these thoughts and opinions that determine how they make the decision - whether too long or short.

Ultimately, the prevailing trend of currency prices will reflect a combination of all traders' emotions and preferences. For example, if the EURUSD pair is trending up, then that implies that most traders have an optimistic sentiment towards the pair.

Since most of us are retail traders, it is not easy for the market to move in our preferred direction. If you believe the pound is going up, but everyone else believes that the currency is going to fall in value, you won't be able to change the situation unless you have enough money to trade large volumes of it. on the market.

Hence, you need to perform market sentiment analysis to help you determine how to beat the big players in their own game.

You should analyze whether the market is going up or down and then incorporate that into your trading strategy. With sentiment analysis, you can evaluate what most traders are thinking about a currency pair and use the information to make trading decisions.

A popular trading technique that uses market sentiment analysis will involve entering trades that go against the current market sentiment. Hence, market sentiment analysts often do not follow the usual rules of trading: place orders according to popular market trends.

If the market is moving strongly in one direction, market sentiment analysts believe that the saturation level may have been reached - and thus, a reversal is imminent.

For example, if a pair is trending up (bullish sentiment), they will treat it as an overbought condition and will place a Sell order in anticipation of an impending trend change.

Some indicators you can use to gauge market sentiment include a COT (Commitment of Traders) report - issued by the Commodity Futures Trading Commission (CFTC) and indices. Relative Strength (RSI) - indicates overbought and oversold market conditions.

How to combine 3 types of analysis

Example 1

Let's say you are looking for a trading opportunity on the AUDUSD H4 chart below using the Fibonacci tool and the RSI indicator.


Fibonacci tools are often used in technical analysis to identify retracement levels in the market. As you can see on the chart, the pair declined in value, from 0.8135 on January 26, 2018, to 0.7761 on February 9, 2018, before starting to recover again.

Initially, the trading pair slopes down. Therefore, the expectation is that if the price retraces from the swing low position, it might find resistance at any of the Fibo levels marked, giving an opportunity to enter a sell order. So, you can use the Fibonacci retracement tool to identify areas where sell orders can be placed.

After the technical analysis is complete, you will turn to fundamental analysis to reinforce your trading decisions.

You look at the economic calendar and notice that the Governor of the Reserve Bank of Australia (RBA) will issue a statement on December 16, 2018. Such economic reports from central banks are often followed as they affect the value of the currencies involved and lead to an increase in volatility in the market.

While highlighting the future of the RBA's monetary policy decision, the Governor took a dovish stance, leading to a massive depreciation of the AUD.

Hence, since the RBA Governor's statement is dovish about the nation's interest rates, you have an additional reason to place a sell order on AUDUSD.

To add weight to your trading decision, you might consider adding this RSI / Indicator which measures market sentiment on a scale of 0-100.

If the RSI is in the 0-30 range, it shows that the pair is oversold. And if the line is in the 70-100 range it indicates overbought market conditions.

In this case, the RSI shows that AUDUSD is approaching the 70 marks, indicating that a reversal is imminent - and you should consider placing a Sell order.

Here is a summary of your analysis:
  • Technical Analysis: AUDUSD found resistance at the 61.8% Fibo retracement level.
  • Fundamental analysis: The Governor of the RBA made a dovish remark.
  • Market sentiment analysis: AUDUSD is approaching overbought territory.
Therefore, after combining the 3 types of Forex analysis and seeing their consensus with your trading idea, you decide to place a sell order at AUDUSD on February 16, 2018 /

According to your analysis, the pair declined over the next few days.

Example 2

Here is the H4 bracket chart of the GBPUSD pair.


As seen on the chart, the pair's technical analysis indicates that it is flat. The two trend lines drawn in parallel show that GBPUSD is in a sideways trend.

Let's say you want to trade this pair by looking for a chance for the price to break out of the horizontal channel.

If the price can penetrate the upper line of the channel (resistance level), then it could provide an opportunity to enter a buy order. Conversely, if the price can break down to support, it can provide an opportunity to place a sell order.

After the technical analysis is complete, you turn to fundamental analysis to further develop your trading ideas.

You look at the economic calendar and notice that the UK Manufacturing Output report is scheduled to be released on June 9, 2017. High impact news is one of the UK's leading indicators of economic health as it measures the value of goods produced by domestic producers.

When the report was released, it came up with a figure of 0.2% - well below the forecasted figure of 0.8%. As the report was worse than expected, it led to the pound depreciation.

To reinforce your trading idea, you decide to evaluate the sentiment that was prevailing at the time. Looking at the RSI indicator, you see that GBPUSD is approaching the 70 mark, which shows that the upside pressure is fading.

Here is a summary of your analysis:
  • Technical Analysis: GBPUSD's price action is limited to a sideways range.
  • Fundamental analysis: A worse-than-expected UK report sent the pound down, leading to GBPUSD breaking out of the range.
  • Market sentiment analysis: GBPUSD is almost overbought, suggesting an imminent reversal.
As a result, the pair slipped through support and broke the sideways pattern, which gives you an opportunity to enter short.

Epilogue

Using fundamental analysis, technical analysis, and market sentiment analysis together is the key to success in trading. Since all types of analysis have their own pros and cons, indulging in a single method will be the recipe for a disaster!

If you combine different techniques from 3 gu analysis, you will enjoy the best of all of them. With the resonance method, you add weight to trading decisions and can become a more consistently profitable trader!