Investors of the foreign exchange market use analysis in an attempt to predict future movements of the market. If an investor predicts correctly, he'll earn profits; if his predictions fail to come to pass, he'll lose money. Two methods of analyzing the forex market are available: Fundamental Analysis and Technical Analysis.

Using fundamental analysis, an investor considers the influence that economic, political, and social events in a country have on the value of its currency. When a nation's economy is strong and its government is well-established, its currency normally rises in comparison to nations which are experiencing turmoil in their governments or economies.

Early in 2008, the African nation of Zimbabwe became a prime example of a collapsed economy. The situation in Zimbabwe could be easily attributed to a corrupt government whose officials plundered the nation's currency reserves and stole farm land from its people. By mid-2008, Zimbabwe's rate of inflation has reached over 1,000 percent. This means that the every year its currency (called the Zimbabwean dollar or ZWD) loses 90 percent of its value. The value of the ZWD is now lower than the paper it is printed on.

On the other hand, stable economies also find the value of their currencies affected by certain internal and external influences. For example, the decisions of reserve banks such as the Bank of England in theUnited Kingdom and the Federal Reserve in theUnited States can sometimes dramatically affect the currency value in their respective countries.

Another method of analyzing the market, called technical analysis, records data about currency values over a set time period and attempts to discover patterns and trends. If a currency increases in value for several weeks, investors can reasonably assume that this movement will continue--at least for a short period of time. An upward or downward trend is the single most important piece of data that an investor uses in technical analysis. Once an investor accurately identifies such a trend, he can makes trades accordingly, and will more than likely make a profit. The sooner a forex trader can pinpoint these trends, the more successful his trades are likely to be.

John Chen's Trading System (called the Trend Forex System) is built completely upon early detection of trends.

For the best results, an investor should use both fundamental and technical analyses when making forex trading decisions.

Consider this scenario:

An investor compiles data, using only technical analysis, on the value of the Great Britain Pound (GBP) in relation to theUnited States dollar (USD) for the months of October and November 2007. He would see that the GBP's value increased in relation to the USD's value for several days in a row. The increase was about 100 pips per day. On the first Thursday in November (November 8, 2007), he would notice that the forex quote read "GBP/USD = 2.1104/2.1109." Using the past rate of increase as his guide, he would assume that the quote will be about "GBP/USD = 2.1204/2.1209" by the end of that day's trading. With that in mind, the investor buys a standard lot at the rate of 1 GBP = 2.1109 USD, = 47373 GBP. If the GBP rises by 100 pips, he will be able to sell the 47373 GBP for 2.1204 USD a piece, which would be $100,450 with earnings of $450 in just one day.

Just a few hours after the purchase, the investor discovers that the market has moved against him and quote now reads "GBP/USD = 2.0906/2.0911." He decides to accept his loss and sells the 47373 GBP for 2.0906 USD a piece, which comes to $99,294. Instead of that handsome $450 gain, he takes a $706 loss.

How did this happen?

On the first Thursday of each month, the Bank of England sets the base interest rate of the United Kingdom. On that particular day (Thursday, November 8, 2007), the interest rate was expected to be increased, which would have lowered the inflation rate in the UK, thereby increasing the GBP's worth. Instead, the Bank of England put the interest rate on hold and caused the GBP's value to drop.