Many forex traders navigate the market only based on their assumptions. They don’t follow any strategies at all. The problem is that if you’re only trading with your mind, the market won’t give you money.
Forex trading involves a lot of risks. That’s why only those traders who analyze the market before placing their trades become successful and win.
In this article, you’ll learn how to perform market analysis and start placing your trades in forex. Read on below to learn more.
How To Perform Market Analysis
When analyzing the forex market, there are three main categories to consider. Note that different knowledge or skills are required in each category. They’re the following:
- Fundamental Analysis
Based on a country’s economic indicators and various news, this major type of market analysis tries to measure the real value of a currency. Forex traders using fundamental analysis techniques analyze the currency with FX news from a particular country. It’s actually similar to what a stock trader does when analyzing the stock market. The stock trader analyzes news about the company. In contrast, a forex trader follows political and social events, GDP growth, inflation rates, and other economic data reports, as well as follow news of a country to determine a currency’s true value in a specific country.
- Technical Analysis
Despite being a relatively young type of market analysis, technical analysis has already garnered a good following in the forex market. Predicting the future price action through historical price action is the basic premise of this type of analysis. In technical analysis, you only have to look at the chart to make a trading decision. Price resistance, support, indicators, charts, and trends will all be covered by technical analysis.
- Sentiment Analysis
The third type of market analysis tries to give traders an insight into how participants of the market feel about a certain currency. It determines whether market participants are neutral, bullish, or bearish. The underlying principle of sentiment analysis is that people tend to follow crowds and act unconsciously in similar ways—that’s what psychology says. It’s best to combine fundamental and technical analysis with sentiment analysis.
Whether they’re pessimistic or optimistic, it’s always good to know and understand how participants feel about a currency in the forex market. That’s because the value of a specific currency is significantly driven by supply and demand.
How To Start Trading Foreign Currency
Having the right trader setup before you start learning how to trade the market is important. To start trading foreign currency, here are some of the tools you need:
Select A Broker
It’s important to look at what each broker offers since there are a lot of forex brokers to choose from. Quite literally, millions of them exist. You should be able to completely understand what they’re offering and how each broker compares to others if you do your research right. Do more research if necessary. Check reviews of brokers and see what others are saying about them. It’s ideal to opt for a well-known broker since the ones that many people use tend to be trustworthy.
Choose A Trading And Charting Platform
Trading and charting platforms provide the order tickets that you need for placing and managing your trades. They also help you get a view of historical price charts. It’s possible to have a brokerage platform that’s separate from your charting platform. However, they can now be in one place, thanks to advancements in trading technology.
Come Up With A Risk Management Strategy
Before starting to trade, it’s crucial to devise a risk management strategy. Now that you already have a broker, as well as a trading and charting platform, you’re completely free to start trading foreign currency. However, spending a little more time to prepare yourself is still the best action to take at this point.
What’s a risk management strategy? It’s basically a number of rules that you’re going to apply to yourself. It’s going to be a way for you to minimize rookie errors and the effects of losses. That’s why it’s important to analyze the forex market first. By doing so, you’ll be able to enhance the risk management strategy you’re going to follow, thus, improving your chances of earning a good profit.
It’s time for you to start dipping your toes into forex trading waters now that you already know the basics. Remember to take things gradually. One can’t really learn how to trade foreign currencies until they start doing it.
The actual trading is going to be the real turning point of your market analysis and forex trading journey. You’ll see what works and what doesn’t by turning theory to practice. However, it’s important to remember that whatever you do, you shouldn’t expect to start winning immediately. It’s completely normal to make plenty of losses at the onset of your trading journey.