There are many ways to trade Forex and many trading tools to help you along. Once you become comfortable with Forex, you can set up your own trading system which can guide you to profitable trades.
Investors in all kinds of markets depend on technical analysis to show them market trends and price activity. Technical analysis in Forex trading uses graphs and charts to indicate trading momentum and market fluctuations and pinpoint where and when a trade should be executed.
As a currency trader, you will also want to look to fundamental analysis in order to get a total picture of what is going on in a particular country, be it economic, political or social. Any one of these factors will have a direct impact on currencies and will cause the price of the currency pair to move up or down.
Aside from the occasional political overturn or a sudden monetary crisis, most fundamental factors take a long time to be felt by financial markets. It is easy to see them coming and act accordingly. Changes in interest rates, news of higher or lower GPD or any change in government hierarchy are shorter term issues that do have a more immediate effect on currency movement but these events are broadcast long before they are put into motion and there is still time to readjust your trading strategy.
Using fundamentals as a basis for trading is often tricky. It is nearly impossible to avoid a constant bombardment of news and reports that come and go in a matter of seconds leaving behind a trail of information that is often incongruous and complex. With nothing else on which to base our moves, we make split second decisions which are mostly incorrect.
It must be kept in mind that many traders who use only fundamentals to make decisions are often influenced by their own voracity and fear although they may not even be aware of this. It is difficult to be totally objective when it comes to trading. Emotions do get in the way and although it not prudent to do so, we make moves that go against the system we have built, which only ends up in losses.
Technical analysis in Forex takes into consideration fundamental factors as well as the mechanical aspects of the information indicated on charts, graphs and other Forex indicators. Together with fundamental influences, technical analysis incorporates the psychological aspects of the individual trader. It presents a total picture of all the elements together and presents you with the objective view of reality. What you see is what you get.
Some critics of technical analysis believe that reading and interpreting the charts is just guessing based on the fundamental information you already have. They see it as a way to interpret the information at hand with a subjective eye and view the execution of the trade as a confirmation of the price change.
True believers in technical analysis understand its advantages and disadvantages but understand how to make the system work based on this information.