The forex market is the biggest currency market in the world with everyday transactions totaling $2 trillion. Yet there are very few – a measly five per cent of the traders -- who make large profits. The reason is simple. Most people try to trade on instincts and intuition than on meticulous forex research.
They don’t realize that the forex market moves in a wave pattern -- up, down or remains neutral. The trader therefore has to catch the wave at the right time to make money, and the only way that the trader can locate this wave is through research.
The forex markets are very sensitive to political developments, corporate crises, natural calamities, wars etc. A forex trader needs to master these external trends to make the right investment choice. Otherwise, he should buy market movement reports developed by analysts who specialize in future forecasts, or make suggestions based on past market movements.
There are two basic approaches that are adopted to analyze currency market movements - fundamental analysis and technical analysis. The fundamental analyst concentrates on external factors to forecast price movements, while the technical analyst studies the past price movements.
Technical analysis is based on the principle that markets behave in clear patterns. The analyst only needs to find the pattern to be able to predict how the market is going to move. This analysis can be applied with ease to any time frame or currency trades.
Fundamental analysis on the other hand, focuses on the economic, social and political forces that drive supply and demand of financial instruments. The analyst tries to look at the big picture rather than concentrate on individual currency rates. There are no hard and fast rules for this approach and different people have different ways to analyze the various macroeconomic indicators such as economic growth rates, interest rates etc.
Most traders follow a mixed approach, leaning more on technical analysis than on fundamental analysis.