| The object of Forex analysis, is to try and predict | | | | trade in the same direction you are likely to make |
| which way the market is likely to move. If you get | | | | profitable trades. Also, the earlier you identify a |
| your predictions right, you will make a profit, but if | | | | trend, the more chance you have of making |
| you get them wrong and you will lose your money. | | | | profitable trades. |
| There are two types of Forex analysis, Fundamental | | | | Ideally, you need to employ both fundamental and |
| Analysis and Technical Analysis. | | | | technical analysis in your Forex trading. |
| Fundamental analysis involves taking into account the | | | | For example, suppose you were charting the value of |
| social, economic and political forces that influence the | | | | the UK pound (GBP) against the U.S. dollar in October |
| value of a particular country's currency. If the | | | | - November 2007, using technical analysis only. You |
| economy of the country is strong, and the country | | | | would have noticed that for several consecutive |
| has a stable government, then the value of that | | | | days, the GBP was increasing against the USD by |
| country's currency can be expected to rise against | | | | around 100 pips every day. So, on November 8, 2007 |
| the currencies of countries with weaker economies. | | | | (the first Thursday in November), you discover the |
| The most extreme example of a country with a | | | | Forex quote: GBP/USD = 2.1104/2.1109. You figure, |
| weak (collapsed) economy (at the time of writing - | | | | that by the end of the trading day this should have |
| early 2008) is Zimbabwe. The poor state of | | | | increased to around: GBP/USD = 2.1204/2.1209. So |
| Zimbabwe's economy is largely due to horrendous | | | | you buy one standard lot at a rate of 1 GBP = 2.1109 |
| government, with the theft of farm land and | | | | USD, = 47373 GBP. You expect the GBP to rise by |
| plundering of Zimbabwe's currency reserves by | | | | 100 pips, so you can sell your 47373 GBP for 2.1204 |
| corrupt government officials. The rate of inflation in | | | | USD each = $100,450 and earn a nice $450 profit on |
| Zimbabwe is currently over 1,000 percent, so that | | | | the day's trading. |
| the currency loses over 90 percent of its value | | | | You check the exchange rate a few hours later and |
| every year. The value of Zimbabwe's currency is so | | | | you discover that it has moved against you, and the |
| low, that its value is now literally worth less than the | | | | Forex quote: = 2.0906/2.0911. You decide to cut your |
| paper it is printed on. | | | | losses, and sell your 47373 GBP for 2.0906 USD each |
| Even in stable healthy economies however, the | | | | = $99,294. So instead of making $450 profit, you |
| actions of in particular, reserve banks (e.g. Federal | | | | make a loss of $100,000 - $99,294 = $706. So what |
| Reserve in the U.S, Bank Of England in the UK etc.) | | | | happened? The Bank of England sets the UK base |
| can influence the value of the currency. | | | | interest rate on the first Thursday of every month. |
| Technical analysis involves examining currency prices | | | | On Thursday November 8, 2007, The Bank of |
| over a period of time to try and identify trends and | | | | England was expected to increase the UK base |
| patterns. For example, if the value of a particular | | | | interest rate, and hence lower the UK inflation rate |
| currency has been steadily increasing over a period | | | | and increase the value of the GBP. However, the |
| of several weeks, then it is likely that the trend will | | | | Bank of England unexpectedly left the UK interest |
| continue in the future, at least in the short term. The | | | | rate on hold, which caused the GBP to fall in value |
| trend is the most important aspect of technical | | | | instead. |
| analysis. If you can correctly identify a trend, and | | | | |