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In our last lesson, we began to open the door into the field of analysis by investigating the comparison between technical and fundamental analysis. The carry trade was looked at as an example of a fundamental-based strategy that also has some technical application.
Interest rates are a big driver for FX prices. Perhaps more accurately stated, ‘interest rate expectations’ are what market participants keenly follow, focusing on the word play of Central Bankers or the deviation of a single data point in estimating what potential changes may pop up in the future.
For this lesson, we’re going to delve deeper into our introduction of analysis, first by highlighting three different forms of FX analysis.
3 Types of Forex Analysis
Perhaps one item that gets lost in the debate around forms of analysis is the fact that they’re not necessarily competitive with each other. Many traders employ both fundamental and technical analysis, and sentiment analysis can be incorporated, as well.
One way of looking at matters:Fundamental analysis focuses on the inputs that invariably get priced-in to the equation, and this helps to shape the future. Technical analysis, on the other hand, merely looks at the chart (the past) to postulate what may happen in the future.
Something that doesn’t get mentioned enough is the importance of risk management when employing all of this analysis. Analysis is great in that it can offer insight, but it will never enable a perfect prediction. The future always harbors uncertainty. And this is really where technical analysis can shine, in allowing a trader to harness their future projections to the real world of ‘what’s happened’ in the effort of imparting strategy.
