Two major methods used to forecast the behaviour of the forex market are Technical Analysis and Fundamental Analysis which are useful forecasting tools for forex traders. Let’s look at them both.

Technical Analysis studies the effects by predicting price movements and future trends by studying what has happened in the past using charts. It is concerned with what actually happens in the market.
In other words, it examines past market action and uses that data to predict the future. Past trends in most areas of life are almost always good indicators of the future; and forex is no different.

Since forex rates change constantly throughout the day, every day, looking at all the years of past data can be daunting. Smart analysts learned to look at the big picture, to skip the minor details and examine trends over a longer period of time.

Using fundamental analysis to forecast forex markets is a bit more in-depth, but it can also be highly accurate. Basically, fundamental analysis means forecasting the market based on external factors — political moves, government involvement, social movements, even the weather. Someone good at fundamental analysis might forecast forex drop-offs because he knows a country’s government is unstable at the moment, or increases because the country has just elected a popular new leader. Anything that can affect a nation’s economy can affect the exchange rates, and that’s what a fundamental analyst uses to guess at the forex market’s future

Naturally, this means having to know a particular country in-depth, which is hard to do for more than a few countries at a time. (It becomes even more complicated when trying to forecast the euro, since several different countries use that currency.) But having that kind of intricate knowledge makes it much, much easier to forecast forex trends.

Most good forex traders use a combination of both techniques, technical and fundamental. For example, a trader might see that a country is currently facing a particularly strong unemployment rates (fundamental) and know that in the past, strong unemployment rates have meant a weaker economy for that nation (technical). Thus, he can predict down-turns for that nation with some degree of confidence.