Previously we already knew 3 types of forex analysis, if you missing the lesson, you can get back to read them.
With technical analysis, then fundamental analysis and finally sentiment analysis.
Technical analysis is a way of analysis by looking at price history with guidelines.
History will repeat itself.
Fundamental analysis is a way of analysis by looking at the state’s economic conditions.
And government policies to predict which currencies will strengthen and or weaken.
Sentiment analysis is a way of analysis by looking at bullish and bearish using the fundamental outlook, and using price action.
Of the three types of analysis, if they can be related to one another to make trading ideas.
Fundamentals shape market sentiment and technical analysis help visualize current market conditions for planning trading ideas.
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Technical analysis advantage and disadvantage
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On 3 types of forex analysis, first technical analysis.
Technical analysis has several advantages and disadvantages.
This is indeed reasonable because there is no perfect analysis method.
Here are some advantages and disadvantages of technical analysis
Advantage technical analysis
- Used to analyze all markets, instruments, and timeframes, where prices, chart patterns, oscillators, and various indicators are interpreted in the same way.
- No new learning is needed to make new market transactions or time frames.
- Technical analysis believes that all information that influences or potentially influences the price of a particular currency or market is clearly illustrated in the chart, history will repeat itself.
- It provides a clear visual interpretation of the patterns of market behavior.
- It provides prices for entry and exit according to a clear time frame, which is an indication of a potential bullish or bearish.
- Measuring market risk more easily seen.
- Volatility (level of movement) is more clearly seen on a chart than in the form of numbers.
The disadvantage of technical analysis
- Very subjective in interpretation, this can provide a bullish and bearish interpretation by looking at a different time frame.
- In theory technical analysis if history repeats itself this assumption can be inappropriate when unexpected things happen in the market such as geopolitical, economic, and other factors.
- Requiring an understanding of charts and capabilities is honed from practice, making interpretations of price movements based on past prices, and this is not an easy thing to master.
- Random walk theory is a theory that argues that there is no way to be able to predict prices in the market and the repetitive patterns in it provide the assessment that using technical analysis such as chart patterns on charts is nonsense or guesswork.
Analysis of fundamental advantage and disadvantage
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3 types of forex analysis, the second is fundamental analysis.
Fundamental analysis also has advantages and disadvantages of each, including the following
Advantage of fundamental analysis
- Some things in fundamental conditions can make prices move very wide and fast, for example, when NFP news was released could make currency move rapidly.
- Fundamental analysis can be applied in various types of forex and stock markets.
- Broadening the view of global economic conditions that occur in parts of the world.
- Knowing many things that trigger a price movement on a currency pair.
- In the basic economic conditions of a country can be a reference to do long term trading, for example, a country’s unemployment tends to increase, in the long run, it may cause a weakening currency.
The disadvantage of fundamental analysis
- Using previous data, some fundamental analysts will use past data by comparing the data released today, this provides an analysis error bias because past data do not reflect current conditions.
- It requires a longer time to analyze compared to technical analysis because fundamental analysts must gather a lot of news data then filter news to determine the buy and sell decisions of a currency pair.
- Fundamental analysis is also subjective, there will be differences of opinion and views of each analyst in addressing a fundamental condition.
Sentiment analysis advantage and disadvantage
3 types of forex analysis, the third is sentiment analysis.
Sentiment analysis in the most basic definition is defined as an investor’s perspective of an asset or financial instrument.
As a trader, sentiment will be positive if in general, the market is in a positive condition too.
The opposite situation can occur when participants in the market have a negative outlook, then market conditions change to negative.
Although the sentiment is not something unique in the forex market, its influence can be directly felt to the exchange rate of a currency.
Advantages of sentiment analysis
- Allow analyzing a variety of markets, both forex, CFD or crypto markets.
- It provides signals that are more accurate with using price action.
- Understanding the tendency of perspectives of all market participants to be more predominantly bullish or bearish.
- It is a combination of technical analysis with fundamentals.
The disadvantage of sentiment analysis
- It requires crucial fundamental news as a driver of price changes, and not all traders have this access.
- Might occurred bias analysis, because defect of analysis that might occur due to unexpected market changes, because there are multiple market participants.
- Need more time to analyze the market, because buy or sell momentum does not come all the time.
Which Type of Analysis Forex is Best?
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After you know the three ways of analyzing forex, you might ask, which is the best of the three?
In some discussions in the forex forum, maybe you will find an opinion.
That one is better than the other, don’t be fooled by extremists.
Because one method of analysis is not better than the other.
In the end, you should choose a method of analysis that makes you comfortable and profitable in your trading.
If you feel comfortable using technical analysis.
Perhaps, for this reason, the simplest way, as long as profitable you can continue with the analysis method.
But if you are more suited to fundamental analysis and make a profit that way.
You can proceed with the analysis method.
But by studying these three types of analysis will further strengthen your ability to look for opportunities in the market with the aim of making a profit.
If likened, the three types of analysis are a table with three legs.
If one of the legs of the table is broken.
Then you can imagine that the table will not stand upright.
Why learn 3 types of analysis is important?
To become a true forex trader, you must learn these three ways of analysis properly.
Why by studying all three methods of analysis will provide a better understanding of market analysis?
We will try to take a simple example.
if only relying on one method of analysis might be a disaster on your account.
When you return to the chart, you find a good opportunity on GBP/USD and say that this is the best opportunity that will come true, as rain will come from the sky, and this will definitely be easy money. Then you with high confidence open a buy position on the GBP/USD pair, and you are sure that this will be easy money. But wait, after you open the buy position you don't realize that there are fundamental conditions that cause sentiment to change, there are major banks in London going bankrupt. So this causes market sentiment to tend to bring the pair GBP/USD down does not match the direction of your buy order position on this pair. Because market sentiment conditions are opposite to your position, a smile that at the beginning develops suddenly dims, you become angry and eventually come out with a state of loss.
In this case, you experience a loss at the end of the story.
Simply because you don’t pay attention to fundamental analysis and market sentiment that is happening.
Your self-confidence at the beginning is very high, but after experiencing failure then you mentally drop dramatically.
And this kind of condition often happens to most traders.
But they don’t realize that studying the three types of analysis is very important.
Because in forex not all ways are perfect.
There are always gaps in weaknesses, and by covering all methods of analysis.
This will provide a better understanding even though it is not perfect in finding opportunities in the forex market
Studying 3 types of analysis to approach the market is an obligation as a trader because traders do business not gambling, traders must understand the characteristics of the market and its behavior.
Indeed there is no one method of analysis that is almost perfect compared to the others, and therefore requires money management and risk management during trading.
Indeed trading on the financial market is full of speculation, but as a trader, it must be a smart speculator, not just gambling by relying on his luck.