For many years Forex traders based their trading
decisions on fundamental analysis which examines both past and current
political and economic events in order to predict movements in currencies.
However fundamental analysis is a difficult art requiring considerable
knowledge and experience and the ability to handle and analyze enormous
amounts of data. As if this were not enough, there is also considerable
disagreement in many quarters about just what data is and is not important
when it comes to fundamental analysis and, even when it is agreed that
certain data is relevant, there is often further argument about just how
much weight should be attributed to each factor in the equation.
Today there is also a second form of analysis which is widely used and
which is known as technical analysis. While proponents of technical
analysis would probably tell you that it is no easier and in many ways
more difficult an art to master than fundamental analysis, the truth of
the matter is that it is a lot easier to learn technical analysis and this
in no small measure explains why so many traders are adopting it in
preference to fundamental analysis and are opting for technical analysis
training. Which method is better is of course a whole different argument.
In considering technical analysis it is necessary to understand its
three underlying principles:
1. All sorts of things will produce movements in currency prices,
including political and economic events, but the forces which produce
currency price movements are not important. As far as technical analysis
is concerned it is simply the price movements themselves which are
important and not the reasons for them.
2. A currency
price will follow a trend which can be identified by looking at the
patterns which emerge in the market over time.
currency price not only follows a trend in terms of looking at historical
market data, but will continue to follow this trend in the future. In
effect this principle reflects the technical analyst’s view of human
psychology and a belief that currency price movements are a consequence of
the manner in which people have reacted, and will continue to react, in
Many of the ‘old school’ and ‘fundamentalist’ Forex traders find it hard
to accept the principles of technical analysis and still hold firm to the
belief that you cannot accurately predict a currency’s movement unless you
have a sound understanding of just what factors affect the price of that
currency and indeed just what effect these factors will have on its
Nevertheless, the fact of the matter is that many traders believe that
this is not necessary and base their often extremely successful trading
purely on technical analysis. No system, at least none that has been
devised so far, will predict currency movements with one hundred percent
accuracy but fundamental and technical analysis do a pretty good job.
In its simplest form technical analysis consists of taking historical
price data (the foreign exchange market has over one hundred years worth
of recorded price data) and feeding it into a computer which will then
look for patterns in that data and display these in a graphical format.
The trader can then look at the manner in which a currency’s price is
currently moving and compare this to similar past patterns to predict the
future direction of that currency’s movement.
This is of course a very much simplified view of technical analysis but in
today’s computer age it is easy to see why many younger traders entering
the Forex market are drawn to technical analysis.