Market
Technical Analysis
Technical analysis is the framework in which 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.
Someone who uses technical analysis is called a technical analyst. Traders who use technical analysis are known as technical traders.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in the price. Technical traders generally ascribe to the belief that “It’s all in the charts!”
This simply means that all known fundamental information is priced into the current market price. If price reflects all the information that is out there, then price action is all one would really need to make a trade. Technical analysis looks at the rhythm, flow, and trends in price action. 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 certain price held as a major support or resistance level in the past, forex 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 could possibly act the same way that it did before. Technical analysis is NOT so much about prediction as it is about POSSIBILITY.
Fundamental Analysis
Fundamental analysis is a way of looking at the forex market by monitoring economic, social, and political forces that may affect currency prices.
Unlike technical analysis, which relies on historical price data and chart patterns, fundamental analysis looks at the broader economic picture to forecast currency price movements. It involves analyzing a country’s economic indicators, central bank decisions, political events, and other fundamental factors to predict the future direction of a currency’s price.
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 BLACKPINK song, and whose economy sucks. You have to understand the reasons why and how certain events like an increase in the unemployment rate affect 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, its 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.
Sentiment Analysis
Sentiment analysis is used to gauge how other traders feel, whether it’s about the overall currency market or about a particular currency pair. It involves assessing whether traders are feeling optimistic (bullish) or pessimistic (bearish) about a currency’s prospects. Which triggers greed (“risk-on”) or fear (“risk-off”).
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.
The forex market is driven by human emotions as much as by economic data and news events. When a significant portion of traders shares a common outlook, their collective actions can create trends or influence price volatility. By tapping into this sentiment, you can better understand market psychology, identify potential turning points, and avoid being caught on the wrong side of a trade. 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 and whether to trade in the same direction as the market or against it.