Friday 26 June 2009

Analyzing the Forex Market- Fundamental versus Technical Approaches

In learning how to succeed at the Forex market, you will often hear about analyzing current trends in the market. This analysis is used to predict what direction the market will take and how you should be making trades. It falls into two main categories—fundamental analysis and technical analysis.

Many training sites will tell you to focus on just one, but there are two for a reason. The best approach is to understand the two techniques, consider their pluses and minuses and balance the information provided by both types of analysis. Here is a brief introduction to get you started.

Technical Analysis

Technical analysis is done by studying current trends in the market, comparing them against historic market trends, and making your trade decisions based on the resulting data. This method relies heavily on charts, numeric values and algorithms. Because of this quantifiable data, technical analysis is more straightforward than fundamental analysis. The data is contained within the charts and the main goal of traders is to determine the trend and trade in its direction.

Technical analysis looks at trends reflected in the market, but does not look at the factors influencing those trends. That is where fundamental analysis comes in.

Fundamental Analysis

Fundamental analysis studies the social and economic factors that influence currency value. It considers the strength of a country’s economy, current policy, and any upcoming changes that might influence the currency. Fundamental analysis will also look at interaction and trade between various countries. Because values rely heavily on the confidence placed in a particular country and its economy, fundamental analysis can be important in anticipating trends before they appear in the charts.

Important Tools

Focusing on only one type of analysis is trading without the whole story. Data discovered through both methods influence the market and the value of specific currencies. It is therefore, in your best interest to learn and utilize both analysis methods. When working the Forex markets, you want all the tools you can get.

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