There are three types of Forex Market Analysis which can both apply for binary options as well as for Forex markets. These are Technical Analysis, Fundamental Analysis, and Sentiment Analysis. In this post we are going to understand each type of analysis and understand how each and everyone one of them is pertinent to learning how to make money online trading binary or forex.
Three Types of Forex and Binary Market Analysis
There are three types of market analysis and there has always been a huge debate as to which of the three is the better Forex market analysis!
- Technical Analysis
- Fundamental Analysis
- Sentiment Analysis
Let us be clear. There is no hard and fast rule as to which is the better. A piece of sound advice is probably that the three of them combined together will give you the best results in trading. If only one or the other is used exclusively, it is pretty much like trying to balance on one foot, rather than having the stability of having both feet on the ground!
Forex Market Analysis – Technical Analysis
Studying how the price moves in Binary Trading and Forex markets is the best description for technical analysis.
A trader who is able to look at historical price movements and determine the current trading conditions, will be best placed in making trades based on how the price will potentially move in the future.
Theoretically, all market information is described in price movement. Therefore technical analysis in Forex market analysis becomes a self fulfilled prophesy of “history repeating itself”
If we have a look at the chart below on the 29th August the price of GBP/USD returned exactly to the same position it held on August 19th! The support level held! If we had plotted our Fibonacci Retracement Lines, we will have seen that the price retracement was perfect. The price returned to its support line.
Charting Station courtesy of NetDania
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So basically this is what the first component of Forex Market Analysis, ie., Technical Analysis is all about. If the price held at the support level in the past, it is bound to travel back to the support level in the future.
Traders are literally using historical information to create the future. In real terms, since many traders are looking at the same support and resistance levels, they can form an idea where the price will be heading. One assumes that the price will find its way back to its support or resistance level over a period of time.
Charts are the best and most visible way in which to visualise historical data. Therefore traders will be looking at historical data, ie., charts of different time values in order to spot trends and patterns and of course this will mean, that they can find a good trade set up.
Naturally the more traders that there are looking at the price patterns and signals, the better the chance of the price fulfilling its own prophesy.
Forex Market Analysis – Technical Analysis – Subjectivity
We cannot exclude the fact that technical analysis which form only one part of the Forex Market Analysis can be VERY subjective. Despite the fact that many traders will be looking at the same charts, it does not mean that they all agree at where the price will be heading.
The valuable information set with technical analysis is the concept that the price always returns to its support and resistance at some point. Later, we understand how using tools such as the Bollinger Bands and the Fibonacci Tools, will help us get a clearer idea where the price might be headed, and make some extra money online trading binary options or forex.
Forex Market Analysis – Fundamental Analysis
Economic, Social and Political forces of any country are crucial in determining the strength and weaknesses of their respective currencies. For example as recently as a few weeks from writing this article, we saw the UK vote itself out of the European Union after its Brexit Referendum on the 23rd June.
If we have a look at the charts below we can see how the decision influenced the Sterling against other major currencies. The unexpected results from Brexit, plunged the Sterling to a depth that had not been witnessed since 1985! Sterling hit a 31 Year Low
Although it is very hard to evaluate all the factors that affect the supply and demand of a currency, we know for a fact that when the economy of a country is strong, the currency stays strong. When an economy starts failing, its currency and related assets start falling. If a country is in good shape, and its economic and political temperature are stable, then it is likely that it will attract foreign investment. Foreign investors need to buy the country’s cash in order to invest in that particular place. Hence the demand increases and so does the cost of the currency. A good economy will result in higher currency value, whilst a bad economy will result in a lower currency value.
Another factor that is directly relevant to forex market analysis and fundamental analysis is interest rates. When a country’s economy is strong, it is normal to see government increasing interest rates in order to curb growth and inflation.
Alternately government lower interest rates in an effort to stimulate an economy.
Such important decision made by Governments can be watched by checking the Economic Calendar. Knowing exactly which newsworthy items to watch out for could be an interesting way to either avoid disaster when trading online, or to take advantage of volatility.
Knowing what we already know about Forex market analysis and technical analysis, we already understand that combining the two analysis together will give us a better chance to trading profitably.
Remember that knowledge is power. Ignorance is failure. This could not be more true in online trading.
Forex Market Analysis – Sentiment Analysis
As a trader you may have taken into consideration all aspects of Forex Market analysis. You may have put your best charts forward, plotted all your trading signals, read all the news and the economic updates, and set your perfect trade. However, if you ignore market sentiment, you may as well throw everything out of the window.
For example, yesterday on a commemoration ceremony of 9/11 Hilary Clinton who will be running for President in a couple of months was overcome by heat and abruptly left the ceremony. Hardly an economic factor. But the market sentiment had trepidation and you and sent shock waves in the opening prices of Monday mornings stock markets! The trepidation of her health has resulted in much being written about the potential effect of this on markets
Note that this article is being written on the 12th September 2016 and the article by Brett Arends on Market Watch was written just a few hours ago which proves that market sentiment is a huge factor that influences prices in general.
So finally as a trader you need to take all this information into consideration. Although you may feel it in your bones that prices are going up, this does not automatically mean that they will. If the general market sentiment is that the price will drop, then it will drop. It is therefore very important to gauge the market, to understand whether it is a bullish or a bearish market and include the perception of market direction along with the rest of the Forex Market analysis.
CONCLUSION ON MARKET ANALYSIS
One must remember that getting an education is the only way in which you can make money online in the most active market in the world – that of Forex or Binary Options.
You must also remember that your education will never stop. If getting an education feels boring, we recommend that you stick to your 9 – 5 job! Learning how to trade requires commitment.
Choosing to trade in spite of having little knowledge is only going to guarantee disaster. Using only one of the three forex market analysis is good, but using all three sets of analysis will ensure that you have a better chance of trading success.