Why Most Forex Traders Base Their Foreign Currency Trading On Technical Analysis

Traditionally Forex traders have based their trading decisions on fundamental analysis which looks at both past and present political and economic events to predict future movements in currencies.

Fundamental analysis is not easy and requires the trader to have considerable knowledge of political and economic events and experience in analyzing both. It also requires the trader to work with a hue quantity of data. In addition, there is considerable disagreement amongst traders over just what political and economic data is important when it comes to predicting currency movements and, where agreement does exist, there is still often argument over how much weight each factor in the equation should be given.

Today however traders have the option to abandon fundamental analysis in favor of technical analysis.

Many people believe that technical analysis is nothing more than a modern day extension of fundamental analysis and it is based upon three principles:

First, many things produce movements in currency prices, including political and economic events, but the effect of these forces has already been absorbed into a currency's price at any moment in time. In other words, there is no need to look at the reasons for the movement in a currency price but to simply focus on the price movement itself.

Second, the price of a currency will follow a clearly defined trend which can be seen by examining the patterns which emerge in the market over time.

Third, the price of a currency does not simply follow a trend when looking at historical market data, but will also follow this trend in the future. This principle reflects the technical analyst's view of human psychology and is based upon a belief that past movements in currency prices are the result of the manner in which people have reacted to certain circumstances and that people will continue to react in the same manner, and currencies move in the same way, in the future.

There is often great argument about whether or not technical analysis could possibly work since, in the view of many people, it really does not have any sound basis. However, the truth of the matter is that technical analysis does work. No system can predict currency movements with one hundred percent accuracy but, compared side-by-side, both fundamental and technical analysis do a pretty good job.

Without going into too much detail here (because that would take a very long article all of its own), technical analysis is essentially a computer-based system of analysis which takes historical price data and looks for patterns in that data which can then be presented to the trader in the form of a chart or graph. At the same time the system also looks at a chart or graph of the current price movements of a currency and compares the present pattern of movement with past patterns in order to find a match and thus predict the future direction in which the currency will travel.

Given this picture, it is not too hard to see why younger people who have grown up in today's computer age choose to adopt technical analysis as the basis upon which to make their foreign currency trading decisions.