Forex traders employ a plethora of methodologies to assist in predicting which currencies will either gain or depreciate in value.  Whereas no currency trader possesses a crystal ball, many smart Forex traders over the years have developed regimens of analysis, which can be divided into two primary categories.  The future movements in a currency’s valuation can be projected by using either “fundamental” or “technical” analysis.

Fundamental Analysis, as its name suggests, involves scrutiny of the core underlying fundamental factors that impact the worth of a nation’s currency.  There is a long list of these factors, with the primary ones being inflation, unemployment, money supply and GDP.  Take for example a country’s money supply.  The law of supply and demand dictates that when there is more of something, then it is worth less.  If a country prints a large amount of money, then its value as gauged against other currencies will go down.

Fundamental Analysis requires both a deep degree of understanding of macro-economics, along with close attention to developing world economic events.  Political events, natural disasters and the foreign policy of a nation can also dramatically affect the valuation of a currency.  There is no quick money to be made using Fundamental Analysis since the various forces underlying fundamental currency valuation take a long time to play out.  Forex traders relying upon Fundamental Analysis need to be able to hold their positions for months, if not longer.

The second category of “Technical Analysis” does not take into consideration any of the macro economic or political factors upon which fundamental analysis rests.  Forex traders using technical analysis attempt to profit from quick short-term movements of currencies.  These second-to-second movements are not driven by tangible events.  Technical Analysis seeks to notice patterns and signals which, according to past occurrences, portend to a high likelihood of a future event happening.

Technical Analysis relies heavily upon the ability to read charts outlining recent movements of a currency and notice a pattern, which indicates a probability that the currency will move a certain way as it historically has after the given chart pattern emerged.  There are myriad patterns that have been quantified to be either a bearish (bad for the short-term prospects of a currency) or bullish (good for the short-term prospects of a currency) indicators.  The trick is to be able to quickly notice that a pattern or signal has occurred and rapidly act upon it.

The most sophisticated Forex traders have realized that Forex trading software is able to both track fundamental developments, as well as vigilantly be on the lookout for either bullish or bearish signals and patterns.  The human mind can only process so much information at once.  Forex traders who attempt to manually trade often end up missing the brief window that a good technical indicator presents.  Now that the prices associated with even the best of these Forex trading software packages are within anyone’s range, there is no excuse for trying to go it alone in your quest to conquer the currency market.