There are two types of analysis which are used in Forex trading: fundamental analysis and technical analysis. Fundamental analysis means current political and economic events in order to forecast movements in currencies, while technical analysis uses historical economic data to forecast movements in the Forex market.
There are three underlying assumptions to technical analysis:
1. Movements in the market price are the output of a combo of all the forces which are in the market. While currency prices can be impacted by all sorts of things including political events, economic conditions, supply and demand and even the weather, technical analysis is not concerned with the reasons for movements in the market but is only concerned with the movements themselves.
2. Currency market prices follow trends. Over the time a number of market patterns have been recognized and technical analysis assumes that these have predictable consequences.
3. Movements in the market price follow historical trends. Forex data has been collected from more than 100 years and over the time a number of patterns have appeared. These patterns are significant of human psychology and the way in that people react to certain situations.
Although most of the Forex traders will use fundamental analysis to support their trading system, they will also use technical analysis. The biggest problem with fundamental analysis is that it needs a detailed knowledge of the political and economic conditions of a large number of countries and for a lot of traders, this is simply inefficient. On the other hand technical analysis can be used across a lot of different markets and currencies at the same time.
When you are new to Forex trading, then you can get the impression that technical analysis is very difficult and wonder yourself if it is really needed. As with almost any form of investment, you should have a system for trading and that system has to be based upon a forecast of movements in the financial market. Technical analysis has shown itself over the time to be a good tool for forecasting such market movements and is pretty detailed. Certainly nothing will provide you a one hundred percent accuracy because the currency prices are affected by a big number of different factors. It is for this reason that, while a lot of traders use technical analysis, they also back up their trading system with fundamental analysis.
Any Forex Broker will offer you access to an assortment of different tools which can be used for technical analysis and most of these tools, that will have the skill to update in real time, will normally be made available free of charge with some extra professional analytical tools being offered for a fee.
Before you begin Forex trading it is a good idea to make yourself familiar with the market behavior by following Forex charts for a certain of time and by studying the market movements and receiving an impression of trends. A lot of Forex Brokers will offer demo accounts just for this aim to train yourself, allowing you to trade on paper rather than with real money.