In trading, nothing is based purely on luck. Successful traders carry out a series of analysis in order to make reasoned trade decisions. Technical Analysis and Fundamental Analysis, are the most popular analytical tools used by traders for decades.
Fundamental analysis is basically a way of looking at the financial market via the analysis of economic, social and political forces that may affect the demand and supply of a particular currency pair or asset.
Demand and supply are key economic principles. Anyone with some basic economic is aware that these two forces are what determine the price of an asset.
Trading through fundamental analysis is very often referred to as trading the news. The forces of demand and supply are widely used as indicators of where the price of currencies and assets could be headed.
For example, the chart above depicts the demand and supply for the US Dollar. If people start demanding more US Dollar (demand shift to the right) the price will increase and as a result, the quantity will also increase. Conversely, if there was a rise in supply (supply shift to the right) quantity would increase but the price would fall.
Micro and Macro-economic information such as GDP, interest rates, monetary policies and employment statistics are also to be considered since they tend to have major effects.