Fundamental analysis is the study of how global economic news and other news events affect financial markets. It is a way of looking at the forex market by analyzing economic, social and political forces that may affect the supply and demand of an asset. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand.

The idea behind fundamental analysis is that if a country’s current or future economic picture is strong, their currency should strengthen. A strong economy attracts foreign investment and businesses, and this means foreigners must purchase a country’s currency to invest or start a business there so essentially, it all boils down to supply and demand; a country with a strong and growing economy will experience stronger demand for their currency, which will work to lessen supply and drive up the value of the currency.

For example, if the Australian economy is gaining strength, the Australian dollar will increase in value relative to other currencies. One main reason a country’s currency becomes more valuable as its economy grows and strengthens is because a country will typically raise interest rates to control growth and inflation. Higher interest rates are attractive to foreign investors and as a result they will need to buy Aussie dollars in order to invest in Australia, this of course will drive up the demand and price of the currency and lessen the supply of it.

Generally speaking, traders buy currencies with stronger economies at a low price and sell currencies with underperforming economies. So, fundamental trading is most appropriate for two types of traders. Either those up-to-date on significant news events and can research thoroughly, or position traders.

In order to do fundamental analysis in the forex market, you need to follow recent developments about the currencies that you are trading. For example, when US central bank Fed hikes interest rates, dollar demand in the market will increase. Thus, US dollar will start gaining strength. Or when Bank of England cut rates, traders expect British Pound (GBP) to lose value. As you can see, interest rate decisions of every central bank cause change on the prices of the relevant currencies.

Let’s continue with another example. In order to do successful fundamental analysis about USD dollar, you need to follow economic releases like non-farm employment change, unemployment rate, GDP growth, inflation rate, interest rate decisions, and central banker speeches.

The easiest and quickest way for a trader to follow these economic data is the economic calendar.

In addition to economic data and central bank policies, domestic and international politics may have a big impact on the price of the currencies. A political instability or uncertainty such as general elections may cause a currency to lose value. Also, in the case of geopolitical risks such as war, investors tend to avoid the related currency and thus the currency depreciates.

Here is some additional reading to get you going.

• The Economic Calendar: This calendar is going to be central to your trading strategy. A fundamental trader will always know when significant events are about to happen. There is no such thing as an unprepared fundamentals trader.
• The US Non-farm Payroll Report: The US economy is a big part of Forex trading. The major currency pairs all include the US Dollar (USD), so any news that might affect its value will be big news. This jobs report is released at 08:30 (New York, USA) on the first Friday of the month, which is usually a big focus for fundamental traders.
• EURUSD Analysis: Know the history of the pairs you trade, as you will see the same seasonal trends and repeat performances.

Here is an example of how the release of positive NFP (non-farm payroll) reports can affect the market. Should a trader expect this report to show robust job creation, we open a trade before the report is released and go long.

Traders have options of how long to keep the trades open for, as this will affect profitability. When a set profit target is reached, a trade can close automatically using a take profit order, or a trader will continue to monitor the data and try to extend the gain, and close the trade manually.

While Fundamental analysis is not chart based, it is essential to understand how to read charts to confirm that the trade is going in the direction expected. In the case below, the chart shows that the trader would have made 100 pips of profit in 5 minutes, and should they have kept the trade open longer, they would have made 200 pips of profit. Having held the trades open a little longer would have been a more profitable trade.

Technical analysis is the study of the price movement and patterns of a security. It goes hand-in-hand with forex charting. Technical analysis attempts to forecast future price movement through the mathematical analysis of past price action. For many traders, technical analysis is the most important tool for examining the market. Technical analysis involves the study of past and forex prices often though the use of charts with the objective of predicting future prices movements and trends, and identifying opportunities for profitable forex trading.

Various simple tools can be used in technical analysis, such as moving averages, trend lines and support levels, or the advanced trader might choose from a wide range of advanced analyses and theories including relative strength index, Fibonacci studies, cycles, and many more.

Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through

the use of technical studies, indicators, and other analysis tools. Technical analysis boils down to two things:

• Identifying trend
• Identifying support/resistance through the use of price charts and/or timeframes

Markets can only do three things: move up, down, or sideways.

Prices typically move in a zigzag fashion, and as a result, price action has only two states:

• Range: when prices zigzag sideways
• Trend : prices either zigzag higher (up trend, or bull trend), or prices zigzag lower (down trend, or bear trend)

Technical traders use a variety of tools and indicators to help them identify trends and patterns, and allow traders to identify high probability situations. These are ones in which the currency pair has a good chance of moving in a specific direction.

Experienced traders know how to turn a high probability trade into short-term profits, regardless of whether the market is moving up or down. The ability to make money in any market is one of the most significant benefits of CFD and Forex trading.

Technical analysis is based on the theory that the markets are chaotic (no one knows for sure what will happen next), but at the same time, price action is not completely random. In other words, mathematical Chaos Theory proves that within a state of chaos there are identifiable patterns that tend to repeat.

This type of chaotic behavior is observed in nature in the form of weather forecasts. For example, most traders will admit that there are no certainties when it comes to predicting exact price movements.

As a result, successful trading is not about being right or wrong: it’s all about determining probabilities and taking trades when the odds are in your favor.

Part of determining probabilities involves forecasting market direction and when/where to enter into a position, but equally important is determining your risk-to-reward ratio.

Remember, there is no magical combination of technical indicators that will unlock some sort of secret trading strategy. The secret of successful trading is good risk management, discipline, and the ability to control your emotions. Anyone can guess right and win every once in a while, but without risk management it is virtually impossible to remain profitable over time.

Here is some further reading to get you going with the basics.

• Dow Theory: Dow Theory is the basis of all technical analysis, and is a good introduction to basic concepts.
• Charts: This is the first part of a two-part series we have on charts. It will give you an introduction to chart types and how to compare periods. The second part is here when you are ready.
• Directional Bias: One of the principles in Dow theory states that a market will continue moving in a direction until something happens to affect the momentum.
• Momentum: Markets change direction because of a decrease in momentum. A technical trader needs to know how to watch for changes here.

In this example, we are using the charts and a momentum indicator to time the exit of a trade. Because markets will maintain a trend until there is a change in momentum, we can watch for a shift in momentum to indicate that the market could reverse.
Investors will close the trade when they see this change, as they know, potential profits are maximized.

Both the technical and fundamental analysis have their limitations, which is the main reason why some professional traders choose to combine the two. If both technical and fundamental data suggest a profitable trade, the probabilities of success can increase considerably.

Some question the validity of technical analysis. The efficient market hypothesis claims that all past price information is already reflected in the current price. If this is the case, since all the data in the charts is old information, there is no exploitable data to beat the markets. And in this way, fundamental trading is the only way to speculate on future pricing accurately.