Currency traders make decisions by analyzing technical factors and economic fundamentals. Traders must decide which style and/or combination of analysis works best for them.
Technical Traders
Technical traders make their decisions using two primary tools:
* Charting tools (trend lines, support and resistance levels, etc,)
* Quantitative Trading Models (mathematical analysis to identify trading opportunities).
The goal of a technical analysis is to study historical data or past behavior of the market in order to predict future market movements. Traders may using their own charts and/or models, or use those developed by third-party providers.
Fundamental Traders
Fundamental traders analyze key economic data, including news and government reports, to evaluate trading opportunities. They believe that currency exchange rates are affected primarily by economic and political conditions, and occasionally by central banks intervening in the currency markets in an attempt to influence the value of their currencies.
Some of the key figures tracked by fundamental traders include interest rates, inflation, trade balance, GDP (Gross Domestic Product), CPI (Consumer Price Index), PPI (Producer Price Index), capacity utilization, factory orders, durable goods orders, inventories, and employment statistics. They are also constantly evaluating the potential impact of military conflicts, natural disasters, and changes in political leadership.
Another factor that often influences trading decisions is market sentiment. Traders often read news, analyst reports, and Web site bulletin boards to get a sense of the general market sentiment and then trade either with or against that sentiment.
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