Forex markets are subject to an extraordinary level of forecasting effort by those looking to profit from trading patterns and trends. The tremendous growth of forex turnover and market participants has been matched by the growth in the number of theories and techniques employed to forecast markets.

Some approaches are simple and easy to implement, others are highly complex and require significant data and computing power. Because of the numerous drivers of price change no strategy will be foolproof and many strategies simply won't produce a positive return on funds employed.

Technical Analysis

Technical analysis is an extremely popular approach to currency trading. Its beauty is that it is very accessible and many of its underlying techniques are easy to follow and implement.

In essence technical analysis is a forecasting discipline that uses past price and volume history to predict future movements. In doing so traders can employ an array of tools and approaches including price patterns, moving averages, regressions models, relative strength indices, wave theory such Elliot Waves, and number theory such as Fibonacci numbers.

Charting is probably the most popular form of technical forms of technical analysis. Charting involved studying charts of a currency's price history in search of pattern formations that have historically led additional price moves in a certain direction. These patterns often have names such as "Head and Shoulders", "Double Top" etc .

Systematic trading is also very popular and private investors now have access to computing power and data services that were the preserve of large institutions only 10 years ago. Rules based trading uses indicators like 30 day moving averages to generate trading signals to buy or sell.

Many technical analysis tools are available via online trading platforms as well as subscription based services. It is worth being cautious of software packages claiming to produce extraordinary returns because they will almost always disappoint and could just as easily produce extraordinary losses.

Fundamental Analysis

Compared to technical analysis fundamental analysis is more complex because it tries to makes sense of the many variables that impact the future directions of exchange rates. Fundamental analysis is the process of forecasting based on the underlying variables that affect exchange rates.

It is typically used for forecasting medium and long term exchange rate moves, but can also help identify short term trading opportunities by the rapid assessment and trading based on unexpected events, such as economic data being released that is significantly different to expectations.

Exchange rates move because of supply and demand, and there are literally hundreds of factors that affect the supply and demand. Broadly speaking the factors can be grouped as follows:

Economic Factors

There are numerous economic indicators that are published by countries but the ones that usually have the greatest impact on exchange rates are; Growth indicators, Inflation rates, unemployment rates, fiscal policy and monetary policy.

Political Factors

Perceived risk in a country's political conditions often impacts exchange rates. Changes in government that markets perceive to be positive for economic management and sovereign risk would generally benefit a currency as foreign investment is more likely to be attracted.

Capital Flows

Although often driven ultimately by economic and political factors capital flows occur when large institutions reallocate money from one country to another. These funds could be central bank reserves or savings held by mutual funds.