babypips

Kindergarten Three Types of Analysis

Which Type of Analysis for Forex Trading is Best?

Ahhhh, the million­dollar question…

Partner Center
Find a Broker

Throughout your journey as an aspiring trader, you will

find strong advocates for each type of analysis.

Whereas technical analysis (TA) involves poring over

charts to identify patterns or trends, fundamental
analysis (FA) involves poring over economic data reports
and news headlines.
 Best MT4 Broker
TRADE NOW
with lowest cost

Hardcore traders in the technical analysis camp scream, “Fundamental

analysis doesn’t matter! FU to FA! It’s already embedded in the price,
which you can see on the charts!”

Hardcore traders in the fundamental analysis camp scream, “Technical

analysis is just a bunch of imaginary lines and drawings! Useless fake
voodoo magic! TA is BS!”

While folks in the sentiment analysis camp are….observing the two camps
fight and monitoring their level of sentiments of each other!

Fortunately, the different types of market analysis complement each

other.

Even hardcore technical traders may find useful fundamental nuggets that
can help with their technical analysis. And vice versa.

In real­world markets, prices are constantly changing, and usually develop

trends. Those changes in prices can and do affect fundamentals.

This means that trends in prices affect fundamentals just as

fundamentals affect prices.
And as you’ll find out in later lessons, identifying trends is a huge part of
technical analysis.

Advertisement

Do not be fooled by these one­sided extremists! One is not better than the
other…they are all just different ways to look at the market.

At the end of the day, you should trade based on the type of analysis you
are most comfortable and profitable with.

To recap, technical analysis is the study of currency price movement on

the charts while fundamental analysis takes a look at how the country’s
economy is doing.

Market sentiment analysis determines whether the market is bullish or

bearish on the current or future fundamental outlook.

Fundamental factors shape sentiment, while technical analysis helps

us visualize that sentiment and apply a framework to create our trade
plans.

Advertisement

Those three work hand­in­hand­in­hand to help you come up with good

forex trade ideas.

All the historical price action and economic figures are there – all you have
to do is put on your thinking cap and put those analytical skills to the test!

Let me pull out that three­legged stool again just to emphasize the
importance of all three types of analysis.

Take out one or two legs of the stool and it’s going to be shaky, right?!

In order to become a true forex trader, you will need to know how to
effectively use these three types of market analysis.

Don’t believe us?

Let us give you an example of how focusing on only one type of analysis
can turn into a disaster.

Let’s say that you’re looking at your charts and you find a good trading
opportunity. Ἲ
You get all excited thinking about the money that’s going to be raining
down from the sky.
You say to yourself, “Man, I’ve never seen a more perfect trading
opportunity in GBP/USD. I love my charts. Mwah. ὡ Now show me
the money!”
You then proceed to buy GBP/USD with a big fat smile on your face
(the kind where all your teeth are showing). ὠ
You take a selfie of this big grin and post it on Instagram.
Then you do a happy dance and post that on TikTok. Ὀ
But wait! All of a sudden the trade makes a 100 pip move in the
OTHER DIRECTION!
Little did you know, but the UK just gave an FU to the EU.
Since you just look at charts, you have no clue WTF an EU is. So you
Google it.
You learn that it stands for the European Union, which is an economic
and political union involving 28 European countries, that allows free
trade, which means goods can move between member countries
without any checks or extra charges.
OMFG! You now just realize that it’s probably serious if the UK wants to
do this. Their economy could be devastated. Lots of people might lose
their jobs.
Suddenly, everyone’s sentiment towards Britain’s market turns sour,
and everyone trades in the opposite direction! ὡ
Your big fat smile turns upside down and you start getting angry at your
charts.
You throw your computer on the ground and begin to pulverize it. (You
 take a photo of it and tweet it out.)
You just lost a bunch of money, and now your computer is broken into a
billion pieces. (But your tweet now has a million likes.)
And it’s all because you completely ignored fundamental analysis and
sentimental analysis. Ὀ

(Note: This was not based on a real story. This did not happen to us. We
were never this naive. We were always smart forex traders… From the
overused sarcasm, we think you get the picture.)

Ok, ok, so the story was a little over­dramatized, but you get the point.

Advertisement

Remember how your mother used to tell you as a kid that too much of
anything is never good?

Well, you might’ve thought that was just hogwash back then but in forex,
the same applies when deciding which type of analysis to use.

Don’t rely on just one.

Instead, you must learn to balance the use of all of them. It is only then that
you can really get the most out of your trading.

Where do we go from here?

Now that you’re done with Kindergarten and learned a little bit about each
type of analysis, it’s time to delve much deeper!

Here’s what’s in store for the next few years of your life…

We’re kidding, we’re kidding! We’re talking about the next few school years
in the School of Pipsology.

Elementary school is the beginner’s guide to technical analysis.

You’ll learn all about the dynamics behind price action, such as support and
resistance levels, Japanese candlesticks, and technical indicators like
moving averages and MACD.

You’ll experiment with leading and lagging indicators and discover how to
use them in coming up with trade ideas.

Sounds pretty exciting, doesn’t it?

The remaining years of Middle School and High School are devoted to
studying more technical analysis tools.

Advertisement

We’ll take a look at the more advanced forex tools also such as pivot
points, divergences, Heikin Ashi, Elliott Wave Theory, and harmonic price
patterns.

Sounds fancy? It’s because they are! Bet you can’t wait to get started on
those!

College will be a bit more complicated since you’ll be tackling both

fundamental AND sentiment analysis at the same time.

Talk about hitting two birds with one stone!

You’re the stone and the birds are… well, you get the point.

A couple of reasons why we’re putting fundamental and market sentiment

analysis together:

By the time you reach college, you’ll be so hooked on learning more

about forex that one lesson simply won’t be enough.
It is hard to draw the line between fundamental analysis and market
sentiment analysis, but you’ll get there with deliberate practice.
As we mentioned earlier, fundamental factors are mostly responsible for
shaping market sentiment.

Those two types of analysis would take up both freshman and sophomore
years of college.

Upgrade to Babypips Premium! Unlock exclusive content that will help prepare you for the
upcoming trading week. Subscribe today and save 20% with an annual subscription!

Next Lesson
3 Types of Price Charts and How to Read Them
 Do not take life too seriously. You will never get out of it alive.Elbert Hubbard

Learn Forex

How to Trade Forex

Forex Quizzes
Forex Forums
Forex Glossary
Forex Margin 101
Technical Analysis 101
Risk Management 101

Forex Tools

MarketMilk™
Economic Calendar
Risk­On / Risk­Off Meter
Position Size Calculator
"Back to Breakeven" Calculator
Pip Value Calculator
Pivot Point Calculator

Company

About
Contact
Advertise
Newsletter
Testimonials
FAQ
Subscribe
Babypips

Facebook
Instagram
Twitter

Babypips helps new traders learn about the forex and crypto markets without falling asleep.

We introduce people to the world of trading currencies, both fiat and crypto, through our non­drowsy educational content and tools.
We're also a community of traders that support each other on our daily trading journey.

Copyright © 2024 BabyPips.com LLC. All rights reserved.

Privacy Policy
Risk Disclosure
Terms of Use
Privacy Manager