Basics of Forex Trading

There are two things one has to know in analyzing financial market: fundamental and technical analysis. Technical analysis studies the price movements while fundamental analysis studies the underlying economic causes for price movements.

1. Fundamental Analysis

Fundamental analysis focuses on the underlying economic factors that move the FX market.
From a fundamental perspective, the two main factors that impact exchange rates are:

• Interest Rates
• Capital and Trade Flows
• Economic conditions (Unemployment, inflation, etc.)

Interest Rates

Any news about interest rates may affects exchange rates. When the interest rate of a currency goes up, a certain currency sometimes becomes more attractive to investors who seek higher returns. More investments are placed in the country and hence the value of this currency in relation to other currencies increases in value.

Capital and Trade Flows

Capital flows represent funds sent from one country to another. This determines the net amount of a currency bought or sold for a foreign investment. Positive capital flow means money coming into a certain country for investments exceeds the investments going out of the country. Negative flow indicates the opposite: more money is flowing out of the country for investments in foreign markets. Trade flows measure the balance of trades (exports - imports).

Trade flows are the buying and selling of goods and services between countries. Net exporters run a trade surplus because they sell more goods to other countries than buying. Net importers run a trade deficit since they buy more goods than they sell. A net exporting country usually has a higher demand for their currency because more people are buying their goods and hence need this currency to pay for these goods.

2. Technical Analysis

This is based upon the study of price movements using statistical data or price patterns. This has become popular over the last decade with the onset of internet and various new innovations in technology. Thus traders have the ability to analyze trends and movements with the help of computers which makes it faster. Two widely used concepts of technical analysis :

• Levels of Support and Resistance
• Trend

Support and Resistance levels

The floor through which the currency pair have difficulties falling is known as support. Resistance is the exact opposite. It is the ceiling by means of which the currency pair experiences difficulties in moving up. Resistance, on the other hand, is the opposite: the "ceiling" through which the currency pair has difficulties moving up.

Trends:

The general direction in which the currency pair moves is known as the trend. Trends could be sideway, downward, or upward. The strength of a trend is determined by its strength.