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There are two basic approaches to analyze the forex market and make trading decisions, fundamental analysis and technical analysis. The fundamental trader concentrates on the underlying causes of price movements in currency pairs, while the technical trader studies the price movements themselves using technical tools.
Forex technical analysis
Technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions.
The primary tools of the technical currency trader are charts. Forex charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.
Example: Trading system for technical traders
Forex fundamental Analysis
Forex traders who prefer fundamental analysis to make trading decisions examine a wide array of economic, social, and political forces to determine how to value underlying currencies. Fundamental traders look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment.
However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued. The main idea behind this type of analysis is that if a country’s economy is doing well, their currency will also be doing well.
For example:
If the FED surprises the market by decreasing the interest rate by 50 bp, the dollar is very likely to fall. If oil prices surge to new highs, the canadian dollar is most likely to rise because it's 81% positive correlation to oil over the past years.
A decrease in unemployment numbers in the US will have have positive affect on the US dollar.
Which type to choose: Technical Analysis or Fundamental Analysis?
Most currency traders abide by technical analysis because it does not require hours of study. Technical traders can follow many currencies at one time. Fundamental analysts, however, tend to specialize due to the overwhelming amount of data in the market. Analyzing and trading currencies based on macro economical facts only can be great for the long term currency investor, an Economic Data Release Calendar provides the date and time of such key economic data releases.
If you are short term fx trader, you can’t rely on macro economical forecasts only, if you really want to succeed as a forex day trader, you need to gain experience in both technical and fundamental analysis to beat the currency market. Technical analysis works well because the currency market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded.
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