Ahhhh, the million-dollar question…
Throughout your journey as an aspiring forex trader, you will find strong advocates for each type of analysis.
Whereas technical analysis (TA) involves poring over charts to identify patterns or trends, fundamental analysis (FA) involves poring over economic data reports and news headlines.
Hardcore traders in the technical analysis camp scream, “Fundamental analysis doesn’t matter! FU to FA! It’s already embedded in the price, which you can see on the charts!”
Hardcore traders in the fundamental analysis camp scream, “Technical analysis is just a bunch of imaginary lines and drawings! TA is BS!”
While folks in the sentiment analysis camp are….observing the two camps fight and monitoring their level of sentiments of each other!
Fortunately, the different types of market analysis complement each other.
Even hardcore technical traders may find useful fundamental nuggets that can help with their technical analysis. And vice versa.
In real-world markets, prices are constantly changing, and usually develop trends. Those changes in prices can and do affect fundamentals.
This means that trends in prices affect fundamentals just as fundamentals affect prices.
And as you’ll find out in later lessons, identifying trends is a huge part of technical analysis.
Do not be fooled by these one-sided extremists! One is not better than the other…they are all just different ways to look at the market.
At the end of the day, you should trade based on the type of analysis you are most comfortable and profitable with.
To recap, technical analysis is the study of currency price movement on the charts while fundamental analysis takes a look at how the country’s economy is doing.
Market sentiment analysis determines whether the market is bullish or bearish on the current or future fundamental outlook.
Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create our trade plans.
Those three work hand-in-hand-in-hand to help you come up with good forex trade ideas.
All the historical price action and economic figures are there – all you have to do is put on your thinking cap and put those analytical skills to the test!
Let me pull out that three-legged stool again just to emphasize the importance of all three types of analysis.
Take out one or two legs of the stool and it’s going to be shaky, right?!
In order to become a true forex trader, you will need to know how to effectively use these three types of market analysis.
Don’t believe us?
Let us give you an example of how focusing on only one type of analysis can turn into a disaster.
(Note: This was not based on a real story. This did not happen to us. We were never this naive. We were always smart forex traders… From the overused sarcasm, we think you get the picture.)
Ok, ok, so the story was a little over-dramatized, but you get the point.
Remember how your mother used to tell you as a kid that too much of anything is never good?
Well, you might’ve thought that was just hogwash back then but in forex, the same applies when deciding which type of analysis to use.
Don’t rely on just one.
Instead, you must learn to balance the use of all of them. It is only then that you can really get the most out of your trading.
Now that you’re done with Kindergarten and learned a little bit about each type of analysis, it’s time to delve much deeper!
Here’s what’s in store for the next few years of your life…
We’re kidding, we’re kidding! We’re talking about the next few school years in the School of Pipsology.
Elementary school is the beginner’s guide to technical analysis.
You’ll learn all about the dynamics behind price action, such as support and resistance levels, Japanese candlesticks, and technical indicators like moving averages and MACD.
You’ll experiment with leading and lagging indicators and discover how to use them in coming up with trade ideas.
Sounds pretty exciting, doesn’t it?
The remaining years of Middle School and High School are devoted to studying more technical analysis tools.
We’ll take a look at the more advanced forex tools also such as pivot points, divergences, Heikin Ashi, Elliott Wave Theory, and harmonic price patterns.
Sounds fancy? It’s because they are! Bet you can’t wait to get started on those!
College will be a bit more complicated since you’ll be tackling both fundamental AND sentiment analysis at the same time.
Talk about hitting two birds with one stone!
You’re the stone and the birds are… well, you get the point.
A couple of reasons why we’re putting fundamental and market sentiment analysis together:
As we mentioned earlier, fundamental factors are mostly responsible for shaping market sentiment.
Those two types of analysis would take up both freshman and sophomore year of college.