Methods of combining the most important market analyzes

How to combine different types of market analysis?

There are several approaches to analyzing financial markets to identify potential areas of market entry. The main types of financial market analysis are:

1. Fundamental analysis
2. Technical analysis
3. Sentiment analysis

Most traders specializing in foreign exchange trading focus on one type of analysis. Professionals believe that combining the above methods increases the chances of generating valuable signals and helps understand market movements. It is really difficult to imagine a person taking risks on the stock market without becoming familiar with the economic calendar. Every day they are published macroeconomic datawhich are intended to present the condition and condition of a given economy. This information is made available to the public at different frequencies. Some of them are published once a week, others once a month, and others once a quarter. Such information is quickly discounted by the market, which translates into increased volatility and dynamic movements that have no technical levels or formation. On the other hand, every "fundamentalist" uses charts to be able to determine the market trend and the moment of entering the position. Technicians and fundamentalists have been fighting for years about which of the above methods is more effective when making investment decisions.

Be sure to read: Precision trading - techniques facilitating entry into the transaction

So how do you effectively use all of the above market analysis techniques? Let's start by discussing each of them.

Fundamental analysis

This type of analysis focuses on the foundations of the economy, in other words it is intended to illustrate the condition of a given country. Unfortunately, in practice this is not just about comparing economic indicators with previous analysts' readings and forecasts. Keep in mind that we have many economic theories that make up the concept of fundamental analysis. One of them is the theory of purchasing power parity. This theory says that every currency should be adapted to the country's economic factors such as inflation or interest rates. The purchasing power parity of money is an indicator whose task is to present the difference in price levels in a given country - it informs us how many units of a given currency we have to pay for a specific basket of goods in individual countries.

Technical analysis

Popular AT relies on forecasting future price changes based on past instrument behavior. Traders using this type of analysis in their investment decisions are guided by three assumptions that guide this method:

1. There is market efficiency and everything is included in the prices,
2. The market is following a trend
3. History repeats itself.

Technical analysis is rich in various types of tools designed to facilitate the decision to enter a position or stay outside the market. You can choose from, among others, oscillators, trend indicators or Fibonacci levels. What will we use in our trading? It depends on your own preferences such as trading style or time frame.

Read also: Trend lines in the LT-4C formation and their application on price abolition

Sentiment analysis

The investor, even before proceeding to place the order on the market, already has an opinion on the observed financial instrument. In addition, each of us has our own view and thoughts on why the market is moving in a certain way rather than different, and this view is revealed when placing an order with a broker.

However, this is not enough to earn. The market is a synthesis of the thoughts of all traders speculating or investing in a given asset. The larger the market, the more opinions and views. Since most of us are retail investors and do not have enough capital to move the market according to our preferences, we should conduct an analysis of market sentiment to be able to join large players or vice versa.

Mood analysis is a type of market analysis that focuses on measuring and interpreting the mental and emotional state of other trading participants. In practice, it comes down to the percentage determination of the number of investors with long and short positions. An analyst who takes into account this type of analysis in his investment decisions will take a position against the generally prevailing "play the trend" principle. If the analysis of sentiment shows that market participants are "bullish" (play for growth) to the observed instrument, then the trader using the above technique will take the position, short. Similarly, when we are dealing with the "bear" market (downward trend), we will take a long position, which means we will play on strengthening the base currency.

Investing, which involves taking a position opposite to the current trend, is called a contrarian technique. It should be borne in mind that the combination of all three market analyzes described above may require a lot of effort and effort from us, but it may also be beneficial in relation to our rate of return.

Tools for determining market sentiment are described in detail in the article "Traders' sentiment - what is it and how to use it in trading?"By Adam Kondracki, so we will immediately go to the possibility of using all the described market analyzes in practice.

Confirmation of trend reversal

The combination of sentiment indicators with selected elements of technical analysis can help the trader determine the credibility of the trend and its strength. If the currency pair changes direction, we can use the mood indicator and check if divergence occurs and make the right investment decision.

Data publication and market reaction

One of the easiest ways to combine fundamental analysis with market sentiment is to track movements during the publication of important macroeconomic data. We will draw the most important conclusions and tips from this type of observation when the data deviate from investors' expectations.

If the observed instrument behaves as it reads during the publication of the data, it means that we are dealing with a strong market (bull or bear) and we should expect corrections to be able to join the crowd. It is not worth fighting with such a market, there is nothing to push under a speeding train. Adopting the opposite position could result in a significant reduction in our investment portfolio.

When the market reacts in the opposite way to the data, a red lamp should light up. This situation may mean that the published data have already been included in the price of the financial instrument or investors with more capital have information about which "plankton" (determination of small investors) will find out with delay. These are good opportunities to enter the position in accordance with the signals from the technical analysis.

Summation

None of the market analysis methods described above must and should not be mutually exclusive. In practice, we should use each of them, because each technique gives a look at the market situation from a slightly different perspective. Fundamental analysis allows you to visualize whether the economy is thriving. If the published data indicate that this is the case and the currency of this country has been in a downward trend for a long time then it may be worth considering buying it, because the currency is most likely undervalued. It should be remembered, however, that in the case of the currency market we must also take a closer look at the economic situation of the country of the quote currency. Technical analysis will be used to determine the moment of entering the market, and market sentiment will show the perception of the market by other trading participants.