There are two major strategies for analysing the foreign exchange (forex) markets: technical and fundamental.

Technical Analysis                                                                   



Technical analysts use mathematical models to predict foreign currency market movements based on historical trends. This analysis lets them spot investment opportunities in the short term.

The trend is the general market direction for that share or type of share. Within the trend there will be peaks and troughs, where the price will rise while it is generally falling, or fall while it is generally rising. Money managers try to buy at a low point in an upward trend and sell during a high point in a downward trend.

Like shares, currencies will often show support and resistance levels. The support level is the point below which the share will not usually drop. The resistance level is the point above which the price will not usually rise. These levels only become apparent over time. In most circumstances, a currency, which is near a support level, will be undervalued and a share, which is near a resistance level, will be overvalued, so money managers will choose to buy and sell accordingly.

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Fundamental Analysis

Fundamental analysts make their decisions based on economic and political events in each country. Political issues; interest rates; inflation and changes, or expected changes, in the import/export trade balance are all important factors to take into consideration. In the shorter term, governments and national banks may choose to buy or sell large amounts of currencies to affect the foreign currency-trading price. Fundamental analysts make their long term decisions based on all these factors and more.

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How fundamentals affect currencies                                        



When interest rates are raised in a country, the currency will usually strengthen in relation to other countries. By contrast, interest rate increases will usually weaken the stock market.

All countries import and export goods. This is called the trade balance. When the country imports more than it exports, there is a trade deficit and the currency will weaken. It will strengthen again as export volumes increase.

Governments can also affect currency values. The currency may weaken during an election, due to uncertainty. The government may decide to buy or sell large quantities of the currency to affect the value. This usually has only a short-term effect, as the volumes traded are too large to be significantly affected in this way.

Our trader uses a combination of both strategies.

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For more information about these issues, click here.

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Fundamental analysis