Three Types of Market Analysis 1. 2. 3.
Technical Analysis Fundamental Analysis Sentiment Analysis
There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know all three. Itâ€™s kind of like standing on a three-legged stool - if one of the legs is weak, the stool will break under your weight and you'll fall flat on your face. The same holds true in trading. If your analysis on any of the three types of trading is weak and you ignore it, there's good chance that it will cause you to lose out on your trade! 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. The main evidence for using technical analysis is that, theoretically, all current market information is reflected in price. If price reflects all the information that is out there, then price action is all one would really need to make a trade. Well, that's basically what technical analysis is all about! If a price level held as a key support or resistance in the past, 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 will act the same way that it did before. Fundamental Analysis: Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of an asset. If you think about it, this makes a whole lot of sense! Just like in your Economics 101 classes, it is supply and demand that determines price. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all the factors that affect supply and demand. In other words, you have to look at different factors to determine whose economy is rock in' like a Taylor Swift song, and whose economy sucks. You have to understand the reasons of why and how certain events like an increase in unemployment affect a country's economy, and ultimately, 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, their 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. For example, let's say that the U.S. dollar has been gaining strength because the U.S. economy is improving. As the
economy gets better, raising interest rates may be needed to control growth and inflation. Sentiment Analysis: Earlier, we said that price should theoretically accurately reflect all available market information. Unfortunately for us traders, it isn't that simple. The markets do not simply reflect all the information out there because traders will all just act the same way. Of course, that isn't how things work. Each trader has his or her own opinion of why the market is acting the way it does, which is expressed through whatever position they take, helps form the overall sentiment of the market. The problem is that as traders, no matter how strongly you feel about a certain trade, you can't move the markets in your favor (unless you're one of the GSs - George Soros or Goldman Sachs!). Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there's nothing much you can do about it. As a trader, you have to take all this into consideration, whether it is bullish or bearish. Ultimately, it's also up to you to find out how you want to incorporate market sentiment into your trading strategy. Which Type of Analysis is best?
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 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 for our trades. Those three work hand-in-hand-in-hand to help you come up with good 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! Donâ€™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.