Among market sentiment, fundamentals, and technical, which type of forex analysis is best? The answer is very surprising, because the three have a complementary nature.
So far, the familiar debate about the best type of forex analysis has always revolved between fundamentals and technicals. Supporters of fundamental analysis argue that price movements are caused by economic conditions.
While supporters of technical analysis consider profits can only be achieved by observing price charts.
But did you know, there is actually one more type of forex analysis that is no less important, namely market sentiment analysis? To reveal the differences and determine which is the best forex analysis, let’s first study the meaning of the three analyzes.
Defining Different Types of Forex Analysis
Fundamental Analysis examines the potential for price movements of various factors that can affect the fluctuation of currency values, such as central bank policies, as well as several releases of economic data related to the economic conditions of a country, for example GDP (Gross Domestic Product), inflation, Unemployment, and so on.
Some extraordinary events such as natural disasters and political upheaval are also part of the fundamental factor.
For example, a trader conducting fundamental analysis of EUR/USD will base his observations on the interest rate policies of the ECB and the Fed, as well as the release of high-impact economic data from the Eurozone and the United States.
The existence of important events such as elections or even conflicts that threaten the stability of the US and the Eurozone, is also an important consideration in conducting fundamental analysis of EUR/USD.
On the other hand, Technical Analysis looks at the price movements that appear on the price chart. Because it is applied with the principle that price movements are always repeated, the purpose of this analysis is to identify patterns of price movements in the past, as a basis for forecasting prices in the future and to find the ideal Buy and Sell moments.
To improve analysis on price charts, traders usually use certain observation methods, or even apply tools in the form of technical indicators.
Meanwhile, Market Sentiment Analysis deals with the consensus of market participants who predict the direction of price movements based on consideration of various things, including fundamental and technical factors.
Three types of market sentiment that have been known in forex analysis are Bullish, Bearish, and Neutral.
- Bullish is the tendency of the majority of market participants to predict price movements will increase.
- Bearish is the tendency of the majority of market participants to predict prices will decline.
- Neutral, meaning that price movements are expected to be stable or flat (traders tend to avoid the market due to a lack of catalysts or a high element of uncertainty, so prices are stuck in a limited range of movements).
Gathering consensus in a decentralized forex market is clearly an impossibility. Because of this, market sentiment is usually only interpreted by in-depth analysis of the current fundamental situation, or by looking at price patterns on charts.
There are market sentiment analysis tools in the form of buying and selling ratios from certain brokers or Commitment of Trader data from CFTC. However, such tools do not represent the consensus of all participants in the forex market.
From the above review, the conclusions are: fundamental analysis looks at data and events that can affect price movements, technical deals with price analysis on charts, while market sentiment measures the consensus of traders about their tendency to buy, sell, or just not enter the market.
Determining The Best Type of Forex Analysis
Among fundamental, technical, and market sentiment analysis, which type of forex analysis is best worth using? Questions like these often cross the minds of novice traders.
They assume that the ‘flow’ of traders can be divided based on the type of analysis used, without really understanding that the 3 types of forex analysis are not contradictory, but complementary.
Fundamentals shape sentiment, while technicals help visualize that sentiment and apply a framework to create a trading plan.
Therefore, it is quite impossible to use only one kind of analysis in forex trading. Can’t believe it? Take a look at an example case here:
1. If only using technical analysis
Then you will only pay attention to the movement of GBP/USD on the chart without taking other factors into account.
Let’s say you find a very good Buy trading opportunity based on a technical signal, then place a Buy Order with great confidence that the price will move according to the technical projection.
However, what happens when the British central bank (Bank of England) announces a sudden cut in interest rates?
The market will panic and sell the GBP/USD you were buying. So, while technical signals can help predict where the next price movement will go, this type of analysis is not able to overcome the unexpected impact of fundamentals and can move prices significantly.
In such a situation, traders who do not ignore the fundamentals will choose not to order, or enter the market only after the announcement of the central bank.
2. If only using fundamental analysis
Then you only know the situations that affect the price movement, without really knowing how to place an Order position at the most ideal price level, and where to place a Close Position target so that trading can still profit.
Knowing the Open and Close Position strategy is very crucial, because this is where you can get the expected profit.
It’s useless to know where the price will move from a fundamental point of view, if you don’t know at what price Buy and Sell should be done.
3. If only using market sentiment analysis
Then your view of the price direction and potential Buy and Sell positions will be even more blurred.
You will only know the tendency of traders to be Bullish, Bearish, or Neutral. Even then it is not very reliable, because the consensus of forex traders taken does not represent all market participants involved.
So it can be concluded: there is no best type of forex analysis among fundamentals, technicals, and market sentiment. The three complement each other, so that it is like a three-legged chair that requires all its legs to stay standing, you can’t just omit one type of forex analysis if you don’t want to fall into the abyss of failure.
The best solution is to combine technical analysis, fundamentals, and market sentiment.
Feeling the hassle of having to learn all three? Indeed, that is the sacrifice of a forex trader who wants to be successful.
If you are lazy to learn and just want a shortcut by understanding only one type of analysis, then don’t be surprised if you find it difficult to become a consistently profitable forex trader.
How To Use The Three Types Of Forex Analysis Above?
Using a combination of 3 types of forex analysis does not always mean you need to put everything in the same portion.
It can indeed be done, but it is less favored by traders who tend to like only one type of analysis.
Believe it or not, traders who lean towards certain types of analysis are usually easier to find, than those who are neutral and can treat technicals, fundamentals, and market sentiment with the same priority.
Focusing on one type of analysis is not a sin or something to be ashamed of, because in fact many experienced traders also take this step.
The difference between professionals and beginners in this regard is that they know that their type of analysis cannot stand alone, and still use other analytical methods to complement their trading.
Meanwhile, amateurs easily override other analyzes when they have chosen their favorite type of analysis.
The well-known figure Jane Foley who is so synonymous with fundamental analysis still has a ‘technical handle’, to help her find potential Entry and Exit positions.
The key to combining all types of forex analysis is to prioritize which ones you can master, then use the other two analyzes as complements or confirmers.
According to Jane Foley, fundamental traders usually rely on fundamental factors to predict price direction, then use basic technical analysis such as Support Resistance or simple indicators (Moving Average), to find the ideal Buy and Sell positions.
Market sentiment analysis in this case can be used to be a confirmation that further strengthens the Entry signal.
Meanwhile, technicalists always observe the chart, both to predict price movements, as well as to open and close positions.
However, they are also not blind to important fundamental data or news releases that can move prices beyond technical predictions.
To anticipate such a thing, they at least pay attention to the forex calendar to know and anticipate the arrival of big impact data releases.
As a first step in achieving the best forex analysis by combining technical, fundamental and sentiment elements, you first need to be familiar with the various charts in forex.
This chart is the place where technical analysis is applied, as well as the location for monitoring the dynamics of price movements as a result of fundamental events and market sentiment.
