What is the best method of analysis for forex trading?

By Ayton MacEachern AAA
A:

Types Of Analysis Used In Forex
Forex analysis is used by the retail forex day trader to determine whether to buy or sell a currency pair at any one time. Forex analysis could be technical in nature, using charting tools, or fundamental in nature, using economic indicators and/or news based events. The day trader's currency trading system use analysis that create buy or sell decisions when they point in the same direction. Forex trading strategies that use this analysis are available for free, for a fee or are developed by the trader themselves.

Fundamental Analysis
Fundamental analysis is often used to analyze changes in the forex market by monitoring factors, such as interest rates, unemployment rates, gross domestic product (GDP) and many other economic releases that come out of the countries in question. For example, a trader analyzing the EUR/USD currency pair fundamentally, would be interested in the interest rates in the Eurozone, compared to those in the U.S. They would also want to be on top of any significant news releases coming out of each country in relation to the health of their economies.

Technical Analysis
Technical analysis can be either manual or automated and is a system that uses past price movement to determine where a given currency may be headed. A manual system involves a trader analyzing technical indicators and interpreting whether to buy or sell. An automated trading analysis, involves the trader "teaching" the software what signals to look for and how to interpret them. Automated analysis takes out the human element of psychology that is detrimental to a lot of traders.

Both automated technical analysis and manual trading strategies are available to purchase over the internet. It is important to note, though, that there is no such thing as the "holy grail" of trading systems. If the system was a perfect money maker, then the seller would not want to share it. This is evidenced in how big financial firms keep their "black box" trading programs under lock and key.

There is no "best" method of analysis to be used by the forex trader. Depending on the trader's time frame, and access to information, either fundamental analysis or technical analysis could be thought of as the most viable option. For a short-term trader, with only delayed information to economic data, but real-time access to quotes, technical analysis may be the preferred method. Alternatively, for the long-term trader, or perhaps for the trader that has access to up-to-the-minute news reports and economic data, fundamental analysis could be preferred.

For more on this topic, see The Forex Market Tutorial.

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