1.3 Aspects of Trading

Most trades on the forex market are a result of traders speculating price movements of certain currencies. Although, good instincts and speculation skills are invaluable to any trader, there are also other, more scientific factors that traders use to tell whether they will buy or sell a certain currency. These factors are very important aspects of trading on the market and are known as fundamental and technical analyses. A trader may utilize both technical and fundamental analyses before making any forex trades.

The Importance of Fundamental Analysis

These factors include economic and political events (i.e. elections, wars) that occur worldwide. Fundamentals include monetary and fiscal policy, government reports such as GDP, CPI, PPI, and measures such as the unemployment rate. A trader that bases his or her market decisions in response to these releases and events is using fundamental analysis. The value of a currency in the Forex market is essentially an indication of the state of one nation's economy in comparison to another nation's.

A nation's political condition, along with its inflation and interest rates, impact the price of the nation's currency. Traders that use fundamental analysis can speculate on currency price movements by paying attention to the world news, economic reports, and indicators issued by the government. By interpreting that data, traders can make better decisions on the market. It is important to note that it is the outlook of an event that impacts the Forex market, rather than the actual event itself. If the report or news matches expectations it should have already been priced in to the present market price. If a report or news item is unexpected, or is different from the anticipated results, then there will be a reaction by the currency markets to "price in" this new information. We explore fundamental analysis in greater detail in Lesson 6.

The Importance of Technical Analysis

Traders have a second tool to use in trading. Technical analysis, which has become extremely popular since its inception two decades ago, consists of using charts, trend lines, support and resistance levels, technical indicators and identifying patterns to study the market's behavior. Traders use these technical factors to identify buying and selling opportunities. Over long historical periods, currency behavior has produced trends and patterns that are identifiable. We explore the basics of technical analysis in Lesson 7.