An Intern Learns – Types of Market Analysis
It’s another day of learning about the fine art of forex trading and when I last left you I was looking into the GBP/USD market and was speculating on the British Pound’s relationship against the US Dollar. I was particularly interested in the peaks and troughs and learnt that these are called areas of resistance and support. Using these patterns as information to base my trades on, I decided that GBP was depreciating and I would sell. Well this didn’t work. I was all pleased with myself when I saw my unrealized P & L (your profit or loss based on your trading) going steadily higher. I got on with some other work and upon looking back I saw the market rising, the opposite of what I expected! After going down in value as I had initially predicted, the market then spiked up right through my Stop Loss and thus ended my trade. Not quite the result I was hoping for. Happily, I am only trading with a practice account!
As I’ve now learnt, and as you would expect, you cannot simply trade based on a brief analysis of the market and your guess as to which way it would go. One thing that could have helped would have been to take advantage of the multiple time frames. Within the Anaylsis view on the MahiFX platform has a whole range of time frames to use right from 1 second all the way up to 1 whole day. I have found the handiest ones to toggle between are the 10 minutes, 30 minutes and 4 hours. In my beginner ways, I - prefer to trade over short periods of time and these time frames give me the information I need. The 10 minutes give a “snap shot” so to speak, where the other larger time frames give a “bigger picture” and often reveal a greater trend. There have been instances where the snap shot shows a descending market whereas the bigger picture reveals that it was, rather, a descent in an otherwise rising market. I should have perhaps looked at the 4 hour view more closely before making a guess on the trend! This kind of trading that has taken my interest is known as ‘scalping’. Much like the ancient war practice of removing the scalp of an enemy (eeek), scalping in FX refers to ‘taking a little off the top’. Traders who scalp the market tend to do many, many little trades, aiming to make numerous small profits on small price changes. Note that this approach can be quite successful, but stick to your strategy and if you had planned on getting out, make sure you stick to this to avoid heavy losses.
However, as handy as this may be, what really would help my trading is to improve my knowledge of the bigger picture. By scalping we are looking at short instances of trading and by understanding the market activity on a grander scale, we should have more success.
Enter market analysis. Now traders have come to develop two key types of market analysis. Each focuses on a different area but together are able to give you a holistic view of the market. If you had to just focus on one area you may be missing out.
The first type is called ‘Technical Analysis’. This is essentially looking at the price movement of the market, and based on its previous movements, speculating where it’s going to go next. When using a technical analysis approach it is best to use the charts themselves as you can visually see the markets going up and down. On a platform such as MahiFX you can zoom in on areas and in this way see where the markets were hours or even days before. By analyzing these movements the future trends are then estimated. Conversely, ‘Fundamental Analysis’ focuses on the way the going’s on of the world effect a currency, and then of course how this currency fares against another. All the economic, social and political factors are taken into consideration. In this type of analysis, following the news is incredibly important. A fundamental analysis of a market is also based on the principles of supply and demand. In this case it would the supply and demand of the country’s currency. If the political, social and economic factors are favourable, it attracts investors to the country and so demand for the currency goes up. This is what would strengthen that currency versus another.
Now if we take both these types of analysis into consideration then we gain insight to what’s called the ‘Market Sentiment’. The best way to think of this is imagine some sand at the bottom of a fish tank. As you lift one corner of the fish tank all the sand slides down to one side. In this case the sand is the opinions of all the traders together. If they collectively think that a market is going to go bullish or bearish, then this becomes an almost self- fulfilling prophecy and the market may in fact go this way. If they all say the market is likely to go bullish, then with all their buying, the demand for the currency will go up so the market will then follow bullish trend.
So as you can see, we need to have a much more holistic view of the forex world in order to make better trading decisions. The more the you know the better you will trade, so keep in touch with global news as well as watching the charts, and use this knowledge to power your decisions.