The million-dollar question, aaaaaaaaaaaaaaaaaa
As an aspiring forex trader, you will come across strong proponents for each form of study.
Fundamental analysis (FA) entails poring over economic data reports and news stories, while technical analysis (TA) entails poring over charts to identify patterns or trends.
“Fundamental analysis doesn’t matter!” shout hardcore traders in the technical analysis camp. To FA, FU! It’s already built into the price, as evidenced by the charts!”
“Technical analysis is just a bunch of imaginary lines and drawings!” screams the fundamental analysis camp. TA is a load of nonsense!” While those in the emotion analysis camp are….watching the two camps clash and keeping track of how they feel about each other! 🤣
Fortunately, the various forms of market research work well together. Even the most ardent technical traders can find fundamental nuggets useful in their technical analysis. And the other way around. Prices in real-world markets fluctuate continuously and tend to build patterns. Fundamentals can and do adjust as a result of market changes.
This suggests that price patterns influence fundamentals in the same way that fundamentals influence prices. Identifying patterns is an essential aspect of technological research, as you’ll see in later lessons.
Don’t be misled by these extreme right-wingers! One is not superior to the other; they are just different perspectives on the market. Finally, you can trade based on the style of research for which you are most comfortable and profitable.
To summarize, technical analysis examines the movement of currency prices on charts, while fundamental analysis examines the state of the country’s economy.
On the present or future fundamental outlook, investor sentiment analysis decides whether the market is bullish or bearish.
Technical analysis helps us visualize sentiment and apply a structure to construct trade plans, while fundamental factors form sentiment.
Those three work together to assist you in coming up with successful forex trading ideas.
All of the historical price and economic data is available; all you need to do now is put on your thought cap and put your 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.
- Let’s say that you’re looking at your charts and you find a good trading opportunity. 🎯
- You get all worked up thinking about how much money is going to fall from the sky.
- “Man, I’ve never seen a more great trading opportunity in GBP/USD,” you think to yourself. I adore my graphs. Mwahaha. Show me the money now!”
- Then, with a big fat grin on your face (the kind with all your teeth showing), you buy GBP/USD.
- You take a selfie of yourself with this wide smile and share it on Instagram.
- Then you do a happy dance and upload it to TikTok.
- But hold on! Suddenly, the trade moves 100 points in the WRONG DIRECTION!
- You may not be aware, but the United Kingdom has just declared war on the European Union.
- You have no idea what an EU is because you just look at charts. Then you look it up on the internet.
- You discover that it stands for the European Union, which is an economic and political union made up of 28 European countries that allows for free trade, which means that products can pass freely between member countries with no checks or fees.
- Oh my gosh! You’ve just realized that if the UK wants to do this, it’s probably serious. Their economy could be ruined. Many people could lose their employment.
- Suddenly, everybody’s opinion of the British stock market has soured, and everybody is trading in the opposite direction!
- Your big fat grin is turned upside down, and you become enraged at your charts.
- You toss your screen on the floor and start pulverizing it. (You take a picture of it and post it on Twitter.)
- You’ve just lost a large sum of money, and your machine has been shattered into billions of bits. (However, your tweet has now received a million likes.)
- And it’s all because you skipped fundamental and sentimental research entirely.
Notice that this is not a true story. This never happened to us. We were never so gullible. We’ve always been shrewd forex traders… We hope you get the idea from the overuse of sarcasm.)
Okay, so the story was slightly exaggerated, but you get the idea.
Remember how your mother used to tell you as a kid that there’s no such thing as too much of anything?
You may have assumed that was nonsense back then, but the same holds true in forex when choosing which form of analysis to use.
Don’t put all your eggs in one basket.
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.
There are a few explanations why we’re combining fundamental and market sentiment analysis:
- You’ll be so eager to learn more about forex by the time you’re in college that one lesson won’t suffice.
- It’s difficult to draw the line between fundamental analysis and market sentiment analysis, but with practice, you’ll get there.
Fundamental factors, as previously mentioned, are primarily responsible for market sentiment.
Both freshman and sophomore years of college will be consumed by these two forms of study.
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