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In FOREX trading there are two common types of analysis that most traders utilize, they are fundamental and technical analysis. Fundamental analysis attempts to predict currency movement based off of political and economy indicators. Technical analysis uses historical economic information to predict changes in the FOREX market.

Fundamental Analysis:

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.

Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Interest Rates – can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade – If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

Technical Analysis:

The other common form of analysis is technical analysis. Technical Analysis is based on the following assumptions:

1. Price movements are a result of combined market forces. Political events, economic conditions, seasonal fluctuations, supply and demand are all things that can effect currency prices. Technical analysts do not concern themselves with why the market moves, they are only interested in the movements themselves.

3. Historical trends can be used to predict current price movements. Data on the FOREX market has been collected for the last 100 years, over that time certain patterns have become emergent. Human psychology and the way people react to certain circumstances are the basis of these patterns.

Most traders consider technical analysis to be of critical importance even though they may also use fundamental analysis to support and confirm the strategy suggested by technical analysis.

Unlike fundamental analysis technical analysis can be applied to many different currencies and markets at the same time. Since fundamental analysis requires detailed knowledge of the economic and political conditions of a certain country it is nearly impossible for any single trader to perform proper fundamental analysis on more than a few countries.

For the beginning trader the complexities of technical analysis may seem overwhelming and they may even wonder if it is actually necessary. If you wish to be successful at FOREX trading you must have a strategy. Any strategy can work but technical analysis has been proven as a reliable and effective method of predicting market changes. Many forces can affect currency prices though so technical analysis is no guarantee, most successful traders utilize a combination of technical and fundamental analysis.

Source: www.LiteForex.org
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