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Forex Trading Basics – Fundamental vs. Technical Analysis

Currency trading is one of the riskiest – and potentially one of the most rewarding- ways to invest.  Those who have a knack for this unique type of market have made fortunes for themselves and their companies, but it is just as easy to lose money trading currencies.  Understanding not only the potential profits but the inherent risks as well is essential to success in currency trading – or in any investment market.

 

Another critical part of successful currency trading is education, and it is vital for new investors to learn as much as possible about how world currencies are traded on the open market.  Knowledge is power when it comes to investing, and it is important for any would be currency trader to seek out as much unbiased information as possible before jumping into the fray.

 

One of the most critical distinctions in the world of Forex currency trading is the difference between fundamental and technical analysis.  These two competing forms of analysis are used by Forex traders to predict the movement of currency prices around the world, and it is important for every investor to understand how each method works.

 

Fundamental analysis is focused on a number of theoretical models.  These sophisticated models are used to predict and determine exchange rates through a series of calculations.  These calculations use a variety of inputs, including current and predicted future economic conditions around the world, and how likely it is those conditions will cause currency fluctuation.

 

Currency traders who use fundamental analysis will also look at factors like supply and demand levels for a particular world currency, as well as recently reported news and other factors that could affect the value of the currency in the short run.  Successful fundamental analysis also addresses social and political factors as well as economic ones, since both politics and social unrest can greatly affect the value of a country’s currency. 

 

Forex traders will also need to be aware of things like unemployment rates, the rate of inflation, predictions for economic growth and other economic factors.  These are all critically important to the effective predication of currency moves.  Unexpected news and announcements – either good or bad – can also greatly increase the volatility of the currency market.  Successful currency traders will need to be able to respond quickly to fast moving world events.

 

Technical analysis is quite a different beast compared to fundamental analysis, and it is important for players in the currency market to understand these two different approaches.  While fundamental analysis uses current events, predicated trends and the latest facts and figures to predict future currency movements, technical analysis relies a great deal on what the market has done in the past.  This analytical tool often uses charts and graphs to display the movement of currency markets in the past and uses those past performance numbers to make predictions about future currency trades.

 

Both types of analysis can be quite useful to Forex traders, and many investors have had great success using both fundamental and technical analysis.  Which method works the best is still the subject of much debate and much heated discussion, and every new currency trader should look at both fundamental and technical analysis before deciding on the best approach.

Tags: analysis, Forex Trading

3 Comments to Forex Trading Basics – Fundamental vs. Technical Analysis

1. [...] Permalink to Original Blog Possibly related posts: (automatically generated)Stocks They happen for healthyFundamental Analysis versus Technical Analysis in Sigma Forex Trading MarketFOREX FUNDAMENTAL ANALYSDollar rebounds from 4-month low [...]
Forex Trading Basics – Fundamental vs. Technical Analysis « Forex Trading Platforms & Tips on June 4th, 2009
2. 

   Other variant is possible also
MetCardCase on November 1st, 2009
3. 

   Oh my god enjoyed reading this article. I added your rss to my google reader!!
daypeWeaway on December 11th, 2009

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