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Fundamental analysis requires a trader to absorb lots of different information from lots of sources and it takes considerable knowledge to interpret it accurately.
Combine this with some basic disagreements as to what type of information is important and you can begin to see why this method took enormous resources and time - two character traits not commonly associated with the individual investor.
The result was that for many years currency trading was almost exclusively the domain of large banks and other financial institutions with the resources to accomplish this complex type of analysis.
Now Currency Trading Is Available To Anyone Willing To Learn
More recently the rise of computer technology and power and the increases in electronic information sources lead to a fundamental shift in the way many traders analyze the Forex market.
Today most traders will use an automated form of analysis known as technical analysis. It involves combining the charting of real-time and historical price movement data for the targeted currencies. Today this is quickly and easily accomplished using computers which have the ability to do the sometimes complex math in near real-time.
What technical analysis really boils down to is simply taking the one hundred plus years worth of recorded historical price data available from the foreign currency market and running it through a computerized charting application to look for patterns and trends.
Once these patterns are discovered they can be quantified and judged in there ability to predict particular price moves in a given direction. Once that is done a trader can begin to look at a currency's current price movements and compare it to similar past patterns to predict the future direction of movement.
So, while technical analysis does require skill, experience, and judgment the fact that it is more automated and less subjective than fundamental analysis drives it's popular adoption. It is likely that the debate over which method is best will never be resolved, but because of it's widespread use most traders must think that technical analysis is more accurate and easier to master.
Training Is The Most Important Factor
A large majority of traders today rely almost exclusively on some type of technical analysis to inform their currency trading decisions - and yet no system, whether based on fundamental and technical analysis, can accurately predict price movements every time but a good technical trader who takes the time to learn a sound methodology can do quite well.
Technical analysis can never substitute for basic fundamental knowledge. Every successful trader knows that their ability to use analysis is directly related to the level and quality of training they have received. That's why it is so important to find a coach and mentor who can train you in the proper application of analysis and teach you proven Forex trading strategies.
Just as a professional athlete like Tiger Woods rely on the right coaches, the best Forex traders constantly train and seek out coaches and mentors who can help them become and remain successful - and you should also!
When starting out in Forex currency trading, there are two basic approaches to analyze the Forex market. These two approaches are Fundamental analysis and Technical analysis. The main elements of these Forex trading styles are explored below.
Technical analysis is the most likely choice for a beginner Forex trader. It focuses on the study of price movement through charts. These charts are used to identify trends and patterns. With this information, they then predict what is most likely to happen in the future, using past events. The theory behind technical analysis is that all market fluctuations is reflected in the currency, thus by examining price action, all trading decisions can be made. Being able to identify trend in the early stages in the key to technical analysis
For example, a basic chart shows the past relationship between any two currencies the investor has chosen. It shows the peaks and troughs in the relationship, and after experience a chart should help the investor predict future currency movements.
Some of the indicators used when applying technical analysis are resistance, support, moving averages, Bollinger bands, trend lines and pivot points. When using price based indicators there are few recommended by traders. They are the relative strength index (RSI), commodity channel index and stochastic oscillator.
If a beginner, this is probably the least likely style to use. Fundamental analysis consists of examining economic, social and political data. They also look at macroeconomic indicators such as inflation rates, economic growth rates and interest rates. The key idea being fundamental analysis is that if a country is doing well, this should also mean their currency is doing well. Most beginners choose not to take on fundamental analysis immediately is because it is a long gruelling process with vast amounts of research to be done. As well as that, an overload on information is possible.
Part of fundamental analysis is examining anything that can affect the currency of a country. For example, news coverage, GDP (Gross Domestic Product) changes, political events, inflation predictions, current events, government reports, retail price data, current events and changes in interest rates.
The impact of economic conditions in a country can affect the value of their currency. For example, government budget deficits or surpluses. The market can react negatively to government deficits whereas the market reacts positively to government surpluses. Another economic condition that can affect a country's currency is trade. For example, if the trade flow for a country suddenly reduces, it can have negative effect on the currency of that country. Analyzing and trading currencies based on fundamental analysis is only good for a long term currency investor.
Market psychology and trader perceptions can influence the market in a variety of ways. This article has explained the differences in the two forex trading styles available, choosing which is best for the trader, is up to their wants and needs.