Now with the knowledge of three type analysis, let us determine the best type of analysis suitable for you.
Before that, let’s brush up through the previous lessons.
✨ Fundamental Analysis – This is a technique to analyze the market by considering the factors which affect the supply and demand of security (currency). Some of the fundamental indicators include interest rates, inflation, GDP, money supply, manufacturing PMI, etc.
✨ Technical Analysis – It is the analysis of the market by understanding the historical price movements of the currency. In other words, it is the study of price movements using technical tools like candlestick patterns and indicators.
✨ Sentimental Analysis – This type of analysis involves understanding the real essence of trading. Here, we get into the shoes of the bug players and determine if they’re buying or selling.
Out of these three, which do you think can help you find success in trading? Well, as a matter of fact, once can succeed in trading only if they have the knowledge of all these three types of analysis. Let us understand with an example of the hurdles that can come your way if you focus only on one type of analysis.
Let’s say a trader named Tim trade only on technical analysis, and he found a good buying opportunity on EUR/USD. But, after he hits the buy, he sees the market falling straight down 100 pips against him due to some news he wasn’t unaware of. This situation brings in emotions in him by which he ends up closing the trade. However, later in the day, he observes that the market ends up going in the direction he predicted.
Here, though his analysis was right, the obstacles like news and emotions took over the technical analysis and put him in a loss. Hence, from this, we can conclude that technical analysis, fundamental analysis, and sentimental analysis are interdependent on each other.
How to structure your analysis?
Above, we have discussed how crucial and dependent all three types of analysis are. However, there are traders in the industry who have expertise only in a kind of analysis but still manage to grow their accounts significantly. Below are some of the tips on how one must structure their analysis, considering they specialize in technical analysis.
- Before you begin to analyze the market, determine if there is any upcoming news on the currency, you’re looking to trade. And it is recommended to stay away from the currency pairs which have fundamental news coming in.
- Once you determine the currency pair you’re going to trade, you can begin your technical analysis on that pair.
- And most importantly, before you place the trade, you must have a complete plan on all the situations that can possibly occur when you’re in the trade, including position sizing, stop-loss levels, and profit-taking levels. Because, once you enter the trade, emotions take over technical analysis which can make you take incorrect trading decisions.
Therefore, following these three simple steps can drastically bring a change in the way you analyze the markets. Cheers.