To become a successful forex trader, one has to understand how markets move. This understanding is a skill that has little to do with luck or guessing currency movements. Like all other skills, it can be honed and optimized with practice. Understanding how markets move is achieved through the analysis of forex markets. Since there are trillions of dollars traded daily in the foreign exchange market, traders have to rely on different types of analysis in forex to anticipate currency movements. And if anything, it has been proven time and time again that with careful analysis of the market, traders can always gain more.
There are three main types of analysis in forex: technical analysis, fundamental analysis, and sentiment analysis. Each of these types of analysis frames the forex market in a certain way, allowing traders to gain insight into the market. Put together, these three types of analysis in forex help paint a detailed picture of the status of the market. Traders who use signals are, in a way, using these types of analysis in their trading work.
One of the main differences between experienced traders and beginners is how well they can perform these three types of analysis in forex. In this article, we will cover how each type of analysis works, highlight the tools traders need for each one, and explain how they can be combined to optimize trading. Read on to improve your trading performance and make money in forex.
What is Technical Analysis in Forex?
In the forex market, technical analysis is the study of historical price data and trading volume. The ultimate purpose is to forecast future market behavior. In technical analysis, traders use charts, patterns, and other technical indicators. These visual guides help to identify trends and support/resistance levels, along with price signals.
In technical analysis, traders believe that to best predict the future of the market, one has to fully understand past price movements. Technical analysis changes its timeframes based on the trader’s strategy. For example, for scalping, the timeframes of technical analysis would be minutes, whereas for long-term strategies, the timeframes for analysis are months. The candlestick chart type is the most common for technical analysis. Use the STP Trading Indicators page to access advanced tools for technical analysis.
Common Tools in Technical Analysis
Some common tools used in technical analysis are:
Moving Averages (MA)
This tool helps traders smooth out the price data in order to identify trends. The most commonly used are Simple Moving Average (SMA) and Exponential Moving Average (EMA). Both tools try to measure trend directions over a certain period but EMA emphasizes the importance of price data that is more recent.
Relative Strength Index (RSI)
This tool is a momentum oscillator that can measure the speed and change of price movements. Its benefit for traders is to point out overbought and oversold conditions.
MACD (Moving Average Convergence Divergence)
MACD is useful for showing the relationship between two moving averages. It helps traders spot trend reversals.
Support and Resistance Levels
The support and resistance levels are key price levels when it comes to understanding when a currency pair tends to pause or reverse.
Why Traders Use Technical Analysis
Some traders might wonder about when technical analysis is most useful. This type of analysis in forex is usually used for these purposes:
- Making quick decisions in fast-paced environments
- Used in short-term tactical strategies such as day trading or scalping.
- Factual and objective since it is based on data points combined with mathematical formulas
To get a deep dive into fundamental analysis, check out our What Is Forex Technical Analysis? blog.
What is Fundamental Analysis in Forex?
The fundamental analysis of the forex market deals with the market on a macroeconomic level. It focuses on economic, political, and financial factors that influence currency value. Traders using fundamental analysis try to understand the driving forces of demand and supply of the market.
The currencies traders buy and sell are all representative of a country or economy. This means that the currency’s value is directly affected by economic health. Central bank policies and global events. Fundamental analysis analyzes geopolitical news alongside economic indicators to make informed decisions with medium and long-term consequences.
Key Economic Indicators
Some key economic indicators that fundamental analysis uses are the following:
- Interest Rates: Central banks such as the Federal Reserve or the European Central Bank set interest rates. These interest rates affect the value of currencies. For example, higher interest rates usually attract foreign capital and increase the currency value.
- GDP Reports: Gross Domestic Product measures a country’s economic performance.
- Employment Data: Reports like the U.S. Non-Farm Payroll (NFP) affect confidence in economic strength.
- Inflation Data (CPI): Affects purchasing power and interest rate decisions.
- Geopolitical Events: Elections, wars, and trade agreements can create market volatility.
Why Traders Use Fundamental Analysis
Traders use fundamental analysis for these purposes:
- Fundamental analysis helps identify long-term trading opportunities.
- Fundamental analysis is best used by position traders and investors for the long-term opportunities they need.
What is Sentiment Analysis in Forex?
Sentiment analysis deals with sentiments or moods, as the name suggests. It is strongly connected to behavioral economics. This type of analysis in forex is fixated on gauging the mood of the market. The point here is not the facts and figures of the market, though they are important, but what traders feel about the facts and figures.
Sentiment analysis deals with market psychology even though it doesn’t provide specific entry and exit points. An example is when traders are feeling bullish running the risk of market reversal because the buying power may already be exhausted. Indicators of sentiment analysis often combine with technical and fundamental analysis to provide the best framework for forex analysis and risk management.
Key Tools for Sentiment Analysis
Some key tools for sentiment analysis include:
- COT Report (Commitments of Traders): This is a report that is issued weekly. It shows the positions of large institutional traders.
- Retail Trader Positioning Tools: Retail trader positioning tools are usually offered to traders by forex brokers or third-party platforms (like MetaTrader 5). Their benefit is that they show the percentage of traders long or short on specific currency pairs.
- Volatility Index (VIX): The volatility index (otherwise known as the fear gauge) measures expected volatility in the market.
Why Traders Use Sentiment Analysis
Traders use sentiment analysis for these purposes:
- Using sentiment analysis, traders can detect overbought/oversold market conditions.
- Traders using sentiment analysis can predict herd behavior better than others.
- Sentiment analysis helps observe the risk of potential market reversal.
Which Analysis is Best for Forex?
There is no one-size-fits-all answer. Each type of analysis serves a unique purpose and suits different trading styles. If you are looking to implement trading decisions based on the best analysis techniques available, check out our Free Forex Signals page. In case you want to know more, check out our What Is Forex Signal? page.
| Analysis Type | Best For | Strengths | Weaknesses |
|---|---|---|---|
| Technical | Day traders, scalpers | Quick decisions, visual signals | May ignore news or events |
| Fundamental | Swing traders, position traders | Big-picture insight, long-term direction | Slower to react to short-term movements |
| Sentiment | All traders | Understands crowd behavior, useful for contrarian strategies | Often subjective, requires interpretation |
Mastering the 3 Types of Analysis in Forex
To understand the three main types of forex analysis—technical, fundamental, and sentiment—is to understand the essence of market movement and make forex market predictions. Each of these types of analysis provides its unique insight into how economic factors change. Though some types of analysis are better for certain trading strategies, all experienced traders combine all three types of analysis to certain degrees based on their respective trading strategies.
But no matter your trading style, it’s crucial to learn all about the three types of forex analysis, whether it takes understanding the past few minutes or months of the market, studying geopolitical news, or observing herd behavior.
To fully benefit from all three types of analysis you should choose the best forex brokers of 2025 to help you achieve the best gains possible. We recommend you open an account with STPTrading. At STPTrading, we offer different trading account types, allowing traders to stick to their preferred trading strategies. Whether you are a scalper, a day trader, a news-driven swing trader, or a combination of all three, opening a demo account with us today is the best way to go!
Technical, fundamental, and sentiment analysis build the foundation—but the 5-3-1 Rule in Forex offers a daily framework to turn analysis into consistent action.
