When trading forex, commodities, stocks and even cryptocurrencies, it is important to be able to analyze the market in order to identify trades that have high profit-making probability.

In this article, we will review the different types of analysis and how they can be combined and used together.

There are three main types of forex market analysis techniques, all with their own advantages and disadvantages.

The three techniques are:

• Fundamental analysis
• Technical analysis
• Sentiment analysis

Fundamental analysis

Fundamental analysis involves viewing the market through an analysis of relevant social, political and most importantly economic events. All these events can greatly influence the supply and demand for, and ultimately the price of, any given asset.

You may be wondering how you can access and utilize fundamental analysis data. A quick way of identifying key event dates is to use economic calendars, which are offered by several websites and brokers.

Here is an economic calendar you can use for your fundamental analysis.

Economic events can be categorized according to volatility they may cause.

There are three categories of volatility:

• High volatility
• Moderate volatility
• Low volatility

High volatility

As the name suggests, a high volatility economic event may cause drastic price changes to an asset’s valuation. Examples of high volatility economic events include: non-farm payroll, unemployment change, interest rate decisions, GDP, manufacturing PMI, Crude Oil Inventories, speeches from FED chairs and presidents.

As a rule of thumb, if a high volatility economic event turns out well or better than expected, the currency for that specific country will appreciate.

For example:

In this example we examine the German Unemployment Change. As Germany is a member of the European Union, we would expect this high volatility economic event to affect the Euro. This particular event shows the changes in unemployment between the current month and the previous month.

When the numbers are higher than expected (meaning that there was a rise in unemployment) the currency should depreciate in value. On the other hand, when the number is lower than expected (meaning that unemployment levels decreased) the value of the currency should appreciate.

Since the above economic event was better than expected (expectation was negative 10k but actual number is negative 11k), the Euro should appreciate. A trader at this point would be well-advised to buy Euros.

This picture shows a H1 chart of EURGBP. At 10:55am,just after the official figures were released, we can see that the Euro appreciated in value. A trader may have bought EURGBP at the end of the 10amand as we can see the trade would have been profitable.

Moderate and low volatility

Moderate and low volatility economic events may sometimes cause some moderate price movement, and in other cases have no effect on price movement at all.  It is always important to be aware of all economic events in any given week, as this will help you to manage your trades.

Advantages of fundamental analysis

• High volatility economic events create good trading opportunities
• Fundamental analysis can change or create trends
• Economic calendars are easily available
• Economic events are easy to decipher in terms of anticipated effects on the economy

Disadvantages of fundamental analysis

• Sometimes the price may move in a direction that is contrary to what the economic event would indicate
• Economic events lead to wider spreads in most brokers

Technical analysis

Technical analysis relies on price action rather than economic events. Technical analysis involves the use of historical chart data  to determine possible future price movements.

Technical traders believe that in theory, all current information (including economic information) relating to an asset is depicted in the current price action, and so price action is an all in one analysis method.

Technical analysts rely heavily on an asset’s historical price information and the easiest way to view historical data is through charts. Most technical analysts search for patterns, price action on support or resistance areas and break outs, along with other factors.

Technical analysts can combine price action and indicators in order to derive high probability trades with suitable risk and reward ratios.

Example 1

The picture above shows a USDCAD H4 chart demonstrating how historical information and price action can be used to analyze the market and enter high probability trades.

From the historical chart information of USDCAD, we can see how price reacts in the support and resistance areas.

Using this information, a technical analyst can decide to buy at support, and sell at resistance because, based on how the price reacted to these levels in the past, these can be considered high probability trades.

Example 2

The picture above shows the chart of GBPUSD on the H4 timeframe.

We can see from historical data that the price is in a downward trend and so a technical analyst will be looking for sell opportunities.

From the trend line drawn, we can see how price reacts when it nears or when it touches the trend line. Any future touch of the trend line would be considered as a high probability sell trade.

Example 3

In this example, we will combine an indicator to price action in order to derive a high probability trade. The chart is GBPUSD on the H4 timeframe and the indicator used is stochastics oscillator set as 8,3,3.

By utilizing both stochastics and price action, a high probability sell signal was generated. The trade would have either been exited when stochastics began to turn back upwards or when the desired take profit level was hit.

Advantages of technical analysis

• In technical analysis, a trader has the freedom to trade on any timeframe
• Technical analysis enables a trader to use various indicators
• Back testing strategies is possible thanks to technical analysis and historical data
• Technical analysis allows the trader to manage trades

Disadvantages of technical analysis

• Technical analysis can be time consuming
• Some indicators tend to repaint and give false signals
• Requires a lot of learning on price action and patterns

Sentiment analysis

Sentiment analysis refers to a methodology that is used by traders to depict the mood or sentiment of other traders and market participants. Traders can either have neutral, bullish or bearish sentiments.

There are various ways one can access market sentiment information:

• COT (Commitment of Traders) report
• From brokers
• From certain financial websites

How integrate the use of fundamental, technical and sentimental analysis

At this point, it is important to remember that there is no holy grail in forex trading and that no analysis method is superior to another.

Combining all three analysis techniques (collectively known as market analysis) will give any trader an advantage when facing the market.

So, how do you combine the three methods?

Firstly, it is important to be aware of the fundamental analysis components such as economic events.

By knowing if the economy of a country is improving or depreciating, a trader can make predictions on the direction of that particular currency.

Secondly, by using resources available, they can check on market sentiments.

You can review the opinions of other traders and this will either align or conflict with his personal views. When the sentiments align, you can then employ technical analysis to create signals in accordance with the fundamental and sentimental analysis discussed above.