There are three main types of analysis in the Forex market: fundamental, technical and sentiment. Each of them has its fans. Some traders prefer to use exclusively technical methods; others make forecasts based on fundamental data. Every trader chooses the type of analysis that is convenient for him. Therefore, it is impossible to say which of the methods of analysis better. One is not better than another, they are just different.
Let’s consider the characteristics of each type of analysis. Technical analysis is the study of the price currency movement using charts and technical indicators. Fundamental analysis is based on the assessment of the economy’s state and the impact of political and economic news on exchange rates.
In addition, there is analysis of market sentiment based on human psychology. The sentiment often depends on the price movement of a particular asset direction. In turn the sentiment is a kind of market participant’s reaction to economic and political events.
The best strategy is to use a combination of three types of analysis. Fundamental factors shape sentiment, while technical analysis helps us to visualize this sentiment, and create a trading strategy. In order to achieve success in trading, you need to consider the fundamental factors, market sentiment and technical indicators’ tips.
If we exclude at least one of the types of analysis, all trading strategy can crumble and you will suffer losses. It’s all the same to pull out one leg from the stool tips. Let’s look at an example.
For example, you were analyzing technical charts and have find a good trading opportunity. You are 100% sure that the price will go exactly in the direction you think. You create a trade order and think that losing is impossible.
But wait! Suddenly there is news that one of the largest banks in the country declared bankruptcy. As a result, the price in an instant makes 100 pips in the opposite direction due to the fact that investors have begun to close their orders after the release of this news. All your hopes gone and the deal, which until recently seemed to be profitable, brought to you by a loss.
That was happened because you made the decision based only on the technical analysis data, completely ignoring the fundamental background and market sentiment. Most likely, the rumors about the Bank bankruptcy appeared for a long time. Most investors have been preparing for this and were cautious in trading, so they have preserve their capital. And you haven’t.
This situation proves that a successful trader should not be neglected fundamental and market sentiment analysis. It is very difficult to learn all three types of analysis simultaneously, but it should be done. Only this way you can get the most out of your trading. That’s why, the all three prediction types combination is the best analysis method in the Forex.