Within the forex trading environment, there are basically two types of analysis used to anticipate what is going to happen to currency movements. These are known as fundamental analysis and technical analysis.
What are the fundamental factors influencing the movement in currency prices? Of course we have to start with the world economy as a whole and the local national economies of the nations involved when we are looking at a specific pair of currencies. Generally, a healthy economy will point to a strong currency and vice versa.
Each time there is a financial report or statement issued concerning the state of a nation such as Gross Domestic Product, statements of the national debt, inflation, employment levels and trade deficits etc, there is a movement in currency values. By analysing historical data it’s possible to predict what might happen when such a report or statement is due.
It’s not only the economy that can cause fluctuations in currency values. Social and political events can have a strong influence particularly events such as an election, social unrest, terrorist attack or a natural disaster. Again it is possible to predict the effect of such events based on historical data.
This method is based entirely around charts to identify trends and patterns in currency movements. There are literally hundreds of technical analysis indicators available to traders and it takes a lot of time and practice to work successfully with this method.
As you would expect there are two schools of thought as to which is the best method and many forex traders will rely on one or the other. However, my advice is that neither method is mutually exclusive. It can be argued that fundamental analysis is based on emotion and technical analysis on logic. Well, like all things in life, the reality is a combination of both.
Fundamental analysis will help to identify large movements in currency prices but technical analysis is better at identifying small fluctuations which cannot be attributed to any significant economic announcement, social or political event.
So my advice is to work with technical analysis for identifying trends and patterns in the short term but also use fundamental analysis to keep and eye on the bigger picture. Forex market analysis using both methods is the way to achieve the best levels of consistent success with forex trading.