There are hundreds of different ways to identify potentially profitable trading opportunities, but each falls under an overarching category of analysis.
With this said, there are three main types of ways to learn to trade Forex, they are:
- Fundamental Analysis
- Technical Analysis
- Trader Sentiment / Trading Psychology
Fundamental analysis centers around reading and analyzing economic, political, and social forces with the understanding that they may affect the asset’s supply and demand levels.
There are varying, more specific fundamental indicators that impact supply and demand zones, and they include: Gross Domestic Product, a currency’s interest rate, inflation, unemployment rates, national bank decisions, and even interviews by political officials can affect an asset’s perceived value.
In the end, fundamental analysis is about keeping track of worldwide news events, and applying that understanding to the economics pushing or pulling a currency pair.
Trading Forex using technical analysis is arguably the most popular form of analysis used by retail traders – and for good reason, it works. Technical analysis is about analyzing an assets price history, and making sense of how it appears on trading charts.
Although past results are not always indicative of future results, this type of analysis revolves around using price history to understand the probability of an assets future moves.
There are several forms of technical analysis, and they include:
- Using on-screen indicators (MACD, RSI, momentum, moving averages and much more.
- Price action trading (naked trading: i.e. support and resistance, trend lines, price structure, etc.)
- Elliot Wave Theory
- Harmonic Patterns
- Price action patterns and candlestick formations
Every trader will use technical analysis in their own way, so there is no right or wrong way to use technical analysis to form trade ideas.
Trader Sentiment / Trading Psychology
Gauging trader sentiment requires a little knowledge of both technical and fundamental analysis. Although price action and charts can visually show us the market’s current and past price, it can’t tell you why each trader, both retail and institutional, take their respective positions on a currency pair.
Every trader has a different view of the markets, everyone has different opinions about why a currency pair is behaving as it is. Think of the financial markets as a place like Facebook, which is made up of a large network where people show how they feel.
Market sentiment is the psychological makeup of any given asset. For example, let’s say USD/JPY has been in a yearlong bullish run. There is an upcoming unemployment report coming out with the expectation from analysts that the numbers will be weak. Taking this, you also see that – using technical analysis – there is a large upcoming resistance level in price on the Weekly time frame.
When the market comes to this level and gets crushed by sellers, you can safely assume price acted this way because of psychology. Technical traders were afraid to buy near this level and sold off their positions to capture their profits. The technical resistance, combined and the bad unemployment numbers, were what caused the negative sentiment on USD/JPY.