There are certain factors that determine a currency’s value in comparison to that of another nation, which determines the pair’s exchange rate and therefore its selling price on the forex trading market. These factors include:

•    the growth rate of one nation’s real Gross Domestic Product (GDP) as compared to that of the other nation;
•    the two nations’ interest rates, again in comparative terms;
•    their comparative rates of inflation;
•    the budgetary deficit or surplus of each nation’s government;
•    each nation’s balance of trade in goods and services, not merely with each other but overall; and
•    the value of each nation’s resource availability, e.g., whether either is dependent upon imports to fulfill its needs or whether it has such a surplus of resources that it can afford to export their overflow to other nations.

All of these indicators detail the fitness of each nation’s economy as compared to the other, and form the backbone of fundamental analysis for forex trading.

Technical analysis, on the other hand, concentrates on the recognition of patterns within the currency pair’s chart, and the interpretation of indicators measuring the price movement’s trend, strength, and momentum.

There are two theories underpinning technical analysis. The first states that all over the world, technical analysts are looking at the same charts, seeing the same patterns, and taking roughly the same actions; therefore, technical analysis takes advantage of the mass psychology of chart readers, forcing the price of a currency pair to move in the desired direction in a sort of money-driven self-fulfilling prophecy. After all, if everyone buys a certain currency pair at a certain price, then the rising demand is bound to force up that price.

Although the theory has its flaws, in particular the belief that everyone who sees a certain chart sees the same patterns, allowing no room for either human error or differing visions, it does seem to hold up rather well with particular currency pairs. For example, the U.S. dollar/Japanese yen cross, due to the large number of candlestick-oriented traders in Japan, tends to respect technical support and resistance levels and reverse at those points when the price action hits the large number of buy or sell orders awaiting it there.

The second theory of technical analysis holds that the market, in the form of fundamental analysts who “trade the news,” will factor in all the economic data on its own; therefore, the technical analyst need only watch the indicators and the charts, avoid trading in the minutes immediately preceding and following any major economic announcement, and the rest will take care of itself.

Both of these systems have their advantages, however, there is one factor that neither seems to take into consideration and that is the element of fear. When trades are driven by emotions, in particular those of fear and greed, logic tends to evaporate. This is when sell-offs, such as recently hit global stock markets, often occur, and neither fundamental nor technical analysis is particularly accurate.

A wise man, Franklin D. Roosevelt, once said that “all we have to fear is fear itself,” and nowhere is that more evident than in the financial markets. Sadly, that lesson must be relearned on a regular basis.