FX Trading: The Better Analysis

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FX Trading

After a reflection on technical, fundamental, and market sentiment analysis it is time to decide what you are going to do with FX trading research. Technical analysis looks at price movement through charts. Fundamental analysis assesses the market on economic stability. Market sentiment shows the fundamental outlook based on opinion of a strong or weakening currency. Fundamental analysis is going to shape market sentiment, while visualisation in technical analysis helps create the framework you see for sentiment. The three types of analyses actually work together, but there are extremists who do not believe this.

FX Trading Left or Right Wing

You can consider some traders to be left or right wing in FX trading. They clearly believe that only one type of analysis exists whether it is technical or fundamental. They tend to gloss over the fact that sentiment even exists. The thing is you can consider these three analysis options to be a forex stool. You have three legs for a stool. If you did not have all three legs the stool would fall down.

It is not wrong to believe in one analysis more than another, but if you completely leave out all of them then there is room for a mistake. Price action on a historical basis helps you see patterns, while economic data helps show why those patterns existed, and sentiment shows how the market reacted to the patterns and economic data. An FX trading example can be used to help you understand this better.

You have looked at currency charts and see the AUD/USD indicates a pattern in favour of the AUD. There has been a 7 month low on the USD against the AUD, thus the AUD is something you want to buy and will undoubtedly see profit for, right? Yet, you sit there and on that day the pips move in favour of the USD. Suddenly something is not right with your technical analysis. The error is in not looking at the news. Australia suddenly had a housing crisis in which their housing bubble burst and the new government was unable to find a replacement for mining income thus the AUD lost all appeal. You ignored the news and just relied on the chart so you missed a big event and lost just as big. This is why FX trading needs you to look at all three concepts, even if you tend to rely on one analysis more than another.

FX Trading Graduation

If you can remember the lesson above about all three types of analyses then you are ready to graduate to some of the other topics, even delve further into each type of analysis for better understanding. Truth is you should never stop learning about FX trading. You always want to see if there are new strategies just as much as you look for the news as you start pulling up charts for currency pairs you will trade. Reading the news you can catch up on what happened and what is expected, therefore you can trade with better care.




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