Forex trading ought to be regarded as an investment and not as a job replacement. Therefore, to succeed in the business of trading currencies, it is important you carry out thorough analysis of the market before executing any trade.

Analysis of the forex market entails predicting the price trend and identifying the best places to enter and exit the market.

There are three main types of analysis:

1. Technical analysis
2. Fundamental analysis
3. Sentiment analysis

Which approach is best?

The truth is that among the three types of analysis, there is no approach that is better than the other.

Technical analysis, fundamental analysis, and sentiment analysis are all just different ways to look at the market.

The best approach is to combine all of them to get better trade ideas. Remember the keyword here is COMBINE.

It is important to note that fundamental factors shape sentiment, whereas technical analysis assists traders to visualize that sentiment and identify the best places to enter and exit the market.

All of the three work hand-in-hand to assist you in increasing your profits in forex trading.

You should not take side with anyone who is promoting one type of analysis while disregarding the others. If you find such type of one-sided extremists, run!

Let us take the following example that illustrates the danger of relying on one type of analysis:

You carry out technical analysis on the EUR/USD and identify a perfect set up for a long trade. You then decide to pull the trigger without a second thought on the trade.

However, almost immediately, the trade goes against you by 100 pips.  Little did you know that the U.S. is releasing the Non-Farm Payrolls data, which has come out better than expected.

Immediately, everyone’s sentiment towards U.S. economy becomes positive and this result in massive sell-off of the EUR/USD.

What would you do in such a case? Cry? Smash the screen of your computer?

Remember that too much of something is not good; thus, if you focus on too much of one type of analysis, then your death as a forex trader may come sooner than you expected.

Summary

In trading forex, you should never rely on just one type of analysis, rather you must know how to balance the use of all of them for every trade decision you make.