So far you have learned about forex and the basics. You have also decided that forex trading is your cup of tea. And now you are eager to know more!
Imagine that you are out in a market, shopping for your Sunday lunch. You have a shopping list and a budget for the ingredients. You know what to buy and at which stall, because this is not your first time here. You even know the market sellers by name. It’s almost like a routine.
Bluntly speaking, that’s the way you prepare for forex trading. You know the market, you have a plan, you follow market price changes, and you use the right combination of ingredients to make a profitable deal.
Preparing for Forex Trading
Before anyone can start trading, it is necessary to study the market first. We need to look at different factors that are affecting prices and also examine what happened in the past that caused prices to move in a certain direction.
If you go blindly into trading you are sure to lose a large amount of money. It would be pure gambling. While it is a fact that all traders lose money at some point, and we cannot avoid losses, what we can do is minimize our losses. Through careful planning and analysis of the markets and the use of different methods, we can achieve this.
Fundamental, Technical and Sentiment Analysis
The three big shots of market analysis that will help you immensely are fundamental, technical, and sentiment analysis.
Fundamental analysis involves looking at economic, political and social factors that affect the market. For example, with regards to the forex market, we would examine interest rates, inflation, unemployment data, GDP, monetary policy, government elections, and so on. The aim of this analysis is to study the causes of the market movement.
Technical analysis however, studies market action primarily through the use of charts for the purpose of predicting future price trends. It is said that everything that can possibly affect price is already reflected in the charts.
Following on from this is the belief that the market basically represents traders’ feelings about the market, and thus represents their sentiment. This is where sentiment analysis comes in. It studies whether the market is bullish or bearish. By taking market sentiment into consideration it will help you when creating a trading strategy. For example, if a market is bullish, you have the opportunity to enter a buy position.
It is hardly possible to say which of the three types of analysis is best, since each method is unique and takes into account different factors. However, it is a good idea to try and use all three. Technical analysis is gaining popularity these days and we will look into this method of market analysis in greater detail later.