Written by Robert McKinley

Types of Forex Trading

Forex trading is based on Forex analysis.

There are two types of Forex analysis:

Fundamental analysis
Technical analysis.

Fundamental Analysis

Fundamental analysis is used to determine the health of a nation’s economy at a particular moment in time. Fundamental analysis considers the economic, social, and political forces that affect a nation’s overall economic health. Since the value of a nation’s currency is a measure of the health of that nation’s economy, fundamental analysis can be important to a Forex trader.

Forex traders use economic news sources to gather information about the various factors that impact the economies of the nations whose currencies in which they are interested. Certain news events affect currency prices more than others and you can (and should) learn more about which ones they are, later.

Technical Analysis

Technical analysis is about the study of price movement. Knowing which way prices are moving and whether there is a pattern or a trend in the movements is very important information to have in Forex trading. Forex traders use various kinds of charts to identify and analyze the price movements of currencies. They use this information to find potentially good trading opportunities.

A VERY USEFUL TIP: One of the most often repeated sayings among Forex traders is: “The trend is your friend.” This is because when you correctly see that a currency has begun to move steadily in one direction (a trend) you may have identified a very profitable trading opportunity. You can use technical analysis and charts for this.

Which type of Forex analysis is better?

The short answer is, neither. They are equally worthy and important. Having said that; while many traders swear by one or the other, many, if not most traders, also use both to a greater or lesser degree. Considering everything, your trading skills can only be enhanced with the knowledge and application of both. If you choose to concentrate more on the fundamentals it would be a good practice to also pay some attention to the technicals – and vice versa. In fact, you could very easily miss something important if you strictly limit your analysis to one or the other and expose yourself to an otherwise avoidable loss.

The bottom line

The more proficient you are in both Fundamental Analysis and Technical Analysis, the better off you will be. The most consistently successful Forex traders are those who have found a comfortable balance between the two types of Forex analysis.

The next lesson is Forex Charts.

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