provides information and insights into whether it’s best to be buying or selling currency pairs and when, based on news, economic conditions and trends. What can this analysis look like? Let’s take a look at three of the main types of Forex analysis
: Technical, Fundamental and Sentiment.
Technical analysis is a common analysis method and appeals to those who like the cold hard facts. It charts patterns in price movements from the past to identify which currencies are trading the strongest and what is predicted to be the best time to buy or sell. The theory is that historical price levels and fluctuations will indicate future prices. It’s not an exact science, and there are a number of chart types you’ll need to familiarise yourself with for in-depth analysis, but technical analysis is essentially based on the theory that history repeats itself. Analysts use high-volume data to identify support levels, which demonstrate levels of demand that theoretically will stop a price from falling, and resistance levels, which demonstrate levels of supply that theoretically will stop a price from rising.
While fundamental analysis is also based on the numbers, it’s less prescribed than technical analysis. It focuses mainly on a currency’s economic, political and social indicators, such as interest rates, employment rates, GDP and inflation, and how these affect supply and demand of a currency. If these indicators are strong the chances are that investors will want to buy that currency, and therefore the currency should strengthen. Those who focus on fundamental analysis pay close attention to any news or economic releases that could affect interest rates and the other economic indicators.
Sentiment analysis is ideal for those who are interested in human behaviour. It involves looking at the overall sentiment of the market and whether a currency value is looking bullish (increasing) or bearish (decreasing). Traders each have their opinion about where a currency is going and they will make that opinion clear by the trades that they make. If a currency is being bought in large numbers, that points to there being large numbers of traders looking to sell in the future. The theory is that what goes up must come down, and vice versa. Some traders will look to contrarian investment in this case, which involves selling at the peak of optimism just before the fall and buying when everyone else is selling.
What’s the best type of analysis for the foreign exchange market? There’s not a simple answer – instead, it’s worth taking notice of all options, blending the different techniques to suit and making your own judgements based on what you read, see and hear.