The Forex market works in the same manner as any other market-it is entirely driven by supply and demand. All those who trade real currency are familiar with the general trend where a currency in demand will fetch a higher price and a currency in excess will show a falling price. It all seems straightforward and simple in theory although the truth is far from this. Predicting movements in the Forex market is an extremely complex task as anyone trading currency will soon learn.
Trading Forex is done with the aid of different methods that try to predict market changes and the future of a currency. The two main methods in use today are the fundamental analysis and the technical analysis of the Forex market.
The Use of Fundamental Analysis
This is the predictive tool that was used through the ages to determine the movements in the Forex market by currency traders. After the mid 1980s this was replaced by other methods of which technical analysis is in the forefront today as the more popular method of understanding the Forex market.
The fundamental analysis takes into account the political climate of the country, its economic stability, financial reports and other news in order to predict the movement of that country’s currency. There is a huge amount of information to sift through and copious amounts of data that have to be read before making a trading decision using this method alone. The expertise that is needed here is to find out what is relevant and what is not. The basic principle of the fundamental analysis is that any deficit or a surplus in the country’s balance of payment causes the currency value to fall or rise.
The Use of Technical Analysis
In the use of technical analysis Forex traders rely on the historical data of a currency’s past performance in order to try and predict its movements in the market. It is believed that there are patterns which can be seen emerging in the market and that these patterns all take the same route as before. Only the movement in the prices is taken into account and not what affects the price change.
Charts are extensively used in technical analysis to aid the Forex trader. The graphical representations shows how the currency has behaved with regard to the price changes over time and can be useful in finding out trends of the movements. There are many types of charts used in trading currency online such as moving averages, candlestick charts, Bollinger bands, oscillators and Fibonacci retracement levels.