 In many ways the Forex is no different from any other market and prices are driven largely by the simple laws of supply and demand. There is one tendency and it says if a currency is in demand its price will rise, but if demand is low its price will fall. And it means it is not so easy to predict movements in currency prices.
Earlier to predict movements in the market most traders relied on one method that was called fundamental analysis. There are many traders who have turned away from fundamental analysis in favor of technical analysis. Anyway, some choose the first method and some the other.
Let's see what these two analytical methods are.
Fundamental Analysis
The principle of this analysis is that it is changes in political, economic and social factors which dictate supply and demand and movements in the market can be predicted by studying these factors.
However, fundamental analysis has problems. The greatest one lies in the huge quantity of data which needs to be analyzed. There is also discrepancy over which data is important and which is not.
Nevertheless, general agreement is that analysis of a country's balance of payments is urgent to the success of fundamental analysis. The balance of payments reflects the flow of currency in and out of a country and a situation in which money is flowing into a country faster than it is flowing out, or on the contrary, will clearly affect currency prices.
Technical Analysis
The principle of technical analysis is simply that, while political, economic and social factors will indeed drive the market, it is not necessary to study, or even to understand. The explanation of this is simple. These factors in whatever combination you choose have occurred time and again in the past and their affect can be seen by simply studying the historical pattern of currency movements.
The chart, or more accurately a series of charts, which provides a graphical representation of the market over time is the main tool of the technical analysis. With the help of a study of such charts you may see that there are clear trends and patterns to price movements and so extending a current chart on the basis of past patterns will show the direction in which a currency will move.
There is a wide range of different charting tools available and widespread discrepancy over which are valuable and which are of lesser or little use.
What to Choose?
In spite of most novice traders today choose to follow technical analysis, you have to consider which method you should adopt. They firmly believe that this is the better of the two methods. The other reason is learning the skills of fundamental analysis takes a great deal of time and involves a steep learning curve and because this is the direction in which Forex trading is moving.
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