Fundamental analysis concerns itself with the causes of price movements and facts which move them, relative to the supply and demand situation. In currency trading, these fundamentals are what drive the big trends which can last for many week, months or years.

 Someone who studies the fundamentals will look at the general economic health of the country which is reflected in it's currency and also political news which affects confidence in the country and also the economy.

Big Trends in FX are Driven by The Fundamentals

Its a fact that over the long term the fundamentals play a key role in terms of currency direction and this can be seen in the fact that currencies trade long term and these trends can be for many months or years and are a reflection of the health of the economy they represent. Of course markets do not move logically.

If it were as easy to trade successfully, as just following the news a lot more traders would win than they do and it's a fact that currencies can collapse when the news is most bullish and rally, when it's at its most bearish and this is true, in any financial market.

Greed and Fear and Short Term Price Spikes

While the fundamentals do play a role in the value of a currency long term; in the short term the emotion of traders comes into play. We all have the same facts to look at but we all draw our own conclusions from them and our view is coloured by the emotions of greed and fear.

In the short term emotion is the key factor which moves prices and they will spike to far either up or down in response to this. A close look at currency trading charts, will show you that these price spikes don't last long and prices quickly come back to fair value which is a reflection of the fundamentals.

Combining Fundamental and Technical Analysis

Fundamental analysis can be hard for new currency traders and that's why many traders use charts instead - but as the fundamentals do play a key role in price movement the trader who learns to read them correctly can make a lot of money.

On a personal level, I like to look at the long term fundamentals behind the big trends and then, use technical analysis to time entry and exit points. Most of the world's top traders do this and if you do it too, you can make some great currency trading profits.