Everybody can take advantage of the Forex market. You've already seen how easy it is to get involved in this market and enjoy the tax advantages, improved leverage, and 24-hour access it provides. The next step is learning what makes the market tick. Once you understand why the Forex market does what it does, you can put yourself in a position to profit from it.
In the Forex market, professionals use two types of analysis to both evaluate what the markets are doing and determine where the markets will be going in the future: fundamental analysis and technical analysis. Fundamental analysis is the study of the factors that affect the economies represented by the various currencies. For example, inflation rates and oil prices affect the economy of the United States and therefore affect the value of the U.S. dollar. We discuss exactly how each of these fundamental factors affects the value of the U.S. dollar later in this book. The important thing to understand at this point is that the U.S. dollar generally has a fairly predictable reaction to changes in fundamental economic factors. And if you know what those reactions are going to be, you can profit from them.
Technical analysis is the study of a currency's price movements on a chart. Forex investors will use charts like the one shown in Figure 1.4 to forecast what they believe will happen next in the market.
Using charts is an effective way of distilling what has happened in the Forex market into an easy-to-use format. For example, if the price is moving higher on the chart, it will most likely continue to move higher unless something happens to change its direction. It's like Newton's first law of motion—an object in motion tends to stay in motion unless acted upon by some other force. Technical analysis helps you identify which direction the price is currently moving and when it might change direction.
Both fundamental analysis and technical analysis can help you be profitable in the Forex market. Unfortunately, most professionals who use fundamental analysis swear by it and scoff at technical analysis. And vice versa for most professionals who use technical analysis. However, we have a different point of view. We figure that if you have both types of analysis available to you, why not use both? Certainly you have a better chance of success if you use all the tools that are available to you. To illustrate, imagine you are back in your
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