Analysis is important prior to any decision making since it will give you consistent view on the action that you are about to make. In terms of trading, this includes the decision either to go long, short or simply to stay aside. Though some claims that analysis is just a self-fulfilling prophecy, still it is vital to ensure that you are systematically taking calculated-risk decisions from time to time. Yes you can rely on those reports by market analysts from many online brokers out there. But wouldn't it be nice to generate and having faith in your own analysis instead? So that if anything happen to your trading positions, you know by heart that you are fully responsible instead of blaming those market analysts who provide opinions that made you clicked the buy instead of sell button.
You will also learn a lot from these self-analysis that makes you become more and more independent each day. After all, this is how you learn on how to ride the profits and cut the losses by understanding the key components in your trading. So instead of taking only 10 pips on every trade, you will understand where to put your reasonable profit targets as well as your stop losses by doing a self-market analysis.
Let's get straight to the points. There are basically 5 things that you need to analyse in particular.
1. TECHNICAL ANALYSIS
This is where all your indicators play its role including the Candlestick chart. You name it. Although indicators will show you the past performance of that particular pair, it does not guarantee the future moves, but it will somehow give you the best probabilities based on previous trending and market movements.
Technical always and will always be my first choice of analysis since market tend to repeat by itself from time to time. Furthermore, most market participants are technicians in general. At certain price levels especially at those key support and resistance areas, bulls and bears are clearly taking turns in determining the market directions, regardless whether short or long term. The thing is, the stronger party always win. Again, though many claims that technical levels are self-fulfilling prophecy, still it is a must for all traders to at least learn and understand a few of these indicators. Otherwise, it would be very hard for you to time your entry and exit especially if you plan to scalp the market.
2. FUNDAMENTAL ANALYSIS
Fundamental relates to the background issues (i.e. mainly geopolitical) with regard to any particular pair that you wish to trade. This relates to that country's fiscal and financial policies, interest rates as well as economic fundamentals. When you do fundamental analysis, you basically compare both countries fundamentals (say US vs Japan) and decide which is stronger than the other based on the current fundamental issues.
I don't want to put all the economic jargon here so my definition is always on the basis to simplify your understanding. The simplest way to do the fundamental analysis is to be aware on the weekly economics calendar (& events) and spend a while reading and understanding the online news (i.e. Bloomberg, Telegraph, Action Forex etc) and updates on daily basis. It is not that difficult after all, in fact simpler than the technical analysis.
Keeping yourself updated is a must so that you have the latest issues in your head prior to making any trade decision afterwards. Nevertheless, always bear in mind that fundamental does not necessarily translate into direct market movement and trending since the basis of bullishness and bearishness of each pairs have many elements that has to be factored in. It is what the market participants are doing that moves the market, not simply the fundamental news.
3. SENTIMENT ANALYSIS
Sentiment Analysis is another unique element of trading that some of my trading colleagues are having difficulties to understand. At times, I am personally bombarded with questions "How do you know?", "How sure are you?", "Where did you get this idea?" etc etc. Of course I would not know for certain. No one does. But don't forget that sentiment is something that you can see with your eyes open as well. How the market reacts and move the price is the one that indicates the real sentiment in the market, especially when a strong trending (i.e. Bullish or Bearish) is currently in place. If I can simplify it further, I would say it is how you feel about the market, without being bias to either bulls or bears.
Sentiments do relate to both technical and fundamental analysis. That is the reason why you need to know both. Why? Because the market is made of people and people act accordingly to their believes. Hence for example if a price is approaching a key resistance level, say at 61.8% Fibonacci level, or triple zeros (e.g. 1.3000) it is not necessary that it will make a u-turn there. You need to blend both technical and fundamental issues since this is the one that generate the current sentiment, or so called market believe at that particular moment of time. So if the sentiment is strong, normally the market break all these supposedly resistance or support level without even looking back. They move together like a herd and conduct stampede from time to time that at times leaving you wondering what is going on.
4. PRICE ACTION (PA) ANALYSIS
Price action is basically a part of technical analysis. It is a direct indication on who is in control at that particular point of time or time frame. Hence, even though you plan to go long based on all your analysis above, it is worth to pay attention to the current price action in order to make the best possible entries.
It is simply done by understanding the Japanese candlestick movement accordingly to your favorite time frame. I used to watch even the 5M (5 minutes) time frame previously but nowadays 15M tend to be my favorite. Of course technically I used all the time frame from 15M above, including the monthly chart as well for my PA analysis. But for scalping and entry purpose, 15M as well as 1HR interval tends to be my most preferred time frame for my intra-day trading decisions.
Learn and understand the various patterns of the shooting stars, dojis, hammers and haramis so that in can be translated into your personal trading signals. These patterns are among the easiest thing to understand so spend some times in learning them. Another thing, you need to watch the price momentum as well since during market trending, sideways and breakout, the price momentum varies from one another. Therefore, as mentioned above, understanding the price action patterns is also vital particularly for your entry and exit timing.
5. SELF ANALYSIS
Believe it or not, this is the mother of all analysis. You know why? Because regardless of what is happening in the market, it will do no harm to your trading account as long as you do nothing. Nevertheless, losing control of yourself due to some personal reasons, fatigue, frustration, tension, or probably work stress will definitely be translated into impulsiveness and poor trading decisions. I must admit that this is the hardest analysis to do in trading.
Hence, I would say that on top of all the analysis that I have outlined above, this one you need to ask yourself since no one else can tell about your state of mind except yourself. How to do this? Check my previous 2 posts and you will find the answer on the RWAPD Method. Again, I must emphasize that this is the hardest analysis to master unless you can be true to yourself, throw your ego away, admit your weaknesses and work to improve them as you move on. Otherwise, you will consistently self-destruct your trading accounts.
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