Analysis in forex trading can be categorised into two areas, fundamental and technical. Fundamental analysis is concerned with the economy of the country. So for instance, if the Gross Domestic Product (GDP), is positive and increasing then the country is growing and its populous (at least the majority of them) will be feeling richer and eager to spend on non-essential items. Businesses too are also likely to go on a spending spree as they nurture a growing balance sheet.
For Policy Makers in the Country's Central Bank, this is a sure sign that inflation will soon rip. As people shop more, the value of the goods are bound to rise as factories in the country and overseas find it difficult to keep up with supplying the goods. As the prices increase so will inflation, especially if businesses also give their employees a pay rise that is in excess of the level of inflation. If this situation is unchecked then the country could get into an ever increasing level of inflation leading to a ghastly era of hyperinflation. History has grave warnings for any country with hyperinflation.
In such circumstances and for obvious reasons, the Central Banks will stamp down hard and early on inflation in the only sure way they know which is by raising their interest rate. The main reason for doing this is to 'mop-up' the excess liquidity in the economy which has other profound consequences such as the resulting rise in the value of the currency. This is a fundamental event in currency trading.
Traders eagerly look out for clues in the numerous economic reports that come out every month for indication as to which way the economy is headed. If the numbers start to point to an improvement in the next GDP figure then they are likely to start speculating on the rise in interest rate at the next policy meeting of the Central Bank and begin purchasing the local currency in anticipation.
Conversely, if the economic indicators are pointing towards contraction in the economy, the Central Bank is likely to loosen their monetary policy by lowering their interest rate. This is done so as to encourage spending in the economy in order to drive the country out of its doldrums but with the consequence of lowering the value of its currency. Once again this is a fundamental event in forex trading.
Technical analysis is concerned with price action on a chart. It is essentially a study on the herd mentality of traders who have a position on that particular currency pair (remember, currencies are traded in pairs for instance EUR/USD). By using indicators on the chart, a trader can gain valuable clues as to where the currency pair is headed next.
Technical traders normally trade on lower time frames for instance anything from 1 minute to 4 hours whereas fundamental traders pick 4 hours and upwards. For the technical trader, the economic news, commentary by government officials and policy makers pose a serious risk of reversing their trades. It is a constant minefield they have to negotiate with their positions.
For the fundamental trader, the technical aspects of the trade are less of a concern and hindrance. Because they are looking at a longer horizon, the technical reversals in price are mere blips on their way to their ultimate goal. Fundamental trading is also known as Position trading and it also usually involves trading at a low or the lowest possible margin.
A notable Position trader is George Soros who in 1992 took a fundamental stance against the British pound and gained a cool 1 billion USD. He speculated that the Bank of England would not be able to keep the British Pound above a certain threshold in which he was proven right and rewarded extremely well for his correct speculation.
Whether trading using the Fundamental or Technical principle, currency trading should be deemed risky and traded cautiously.
Knowledge and preparation are the key to successful forex trading and could contribute significantly to your online income.
To your forex trading success!
Hanif Somani, Ph.D is an Internet Marketer and Forex Trader. Hanif obtained his Ph.D. from University of London in a scientific discipline and is passionate about conveying complex ideas to his audience in a simple but not simpler way. Hanif believes that anyone can succeed in their endeavors if they first obtain the knowledge and then apply it correctly in an incremental way. Knowledge is the key to success and this is what Hanif is happy to convey and share. I write regularly on all aspects of Online Income Sources which you can find on my blog at Making Money Online.
I have written a book on Forex Market and Forex Trading called "Forex Tamed" which you can purchase here: Forex.
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