An Introduction To Fundamental Analysis

It is generally said that information is the basis of profitable Forex trading but, though correct and timely information is indeed vital for currency trading, it is the examination of this information that is the real key. There are currently two main forms of analysis used in Forex trading – fundamental and technical analysis - and in this short article we are going to examine precisely what is meant by fundamental analysis.

At its simplest, fundamental analysis looks at both political and economic conditions that could have an affect upon currency prices and Forex traders who use fundamental analysis rely upon news reports for information on a whole range of things including, economic policy, inflation, growth rates and rates of unemployment.

Basically, fundamental analysis provides an outline of currency movements together with a broad picture of economic conditions that could well alter the value of a particular currency. With this picture in mind, Forex traders will then frequently move on to use technical analysis to then plot entry and exit points into the market and to complement the information gained using fundamental analysis.

The Forex market is much like other markets and is affected by the laws of supply and demand, which are also affected by economic conditions. Two economic factors affecting supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the economy’s balance of trade.

Various economic indicators are published by governments and other sources and are normally considered to be sound measures of economic health that are followed by all sectors of the investment market. Almost all economic indicators are published once a month although some are released more often and usually weekly.

Two of the key fundamental indicators are international trade figures and interest rates, but other extremely helpful indicators include the, consumer price index (CPI), producer price index (PPI), purchasing manager’s index (PMI), durable goods orders and retail sales.

Interest rates are an especially important indicator because they can have either a strengthening or weakening affect on a currency. High interest rates could, for instance, attract foreign investment which strengthens the local currency, while investors in the stock market frequently react to rising interest rates by selling in the belief that higher borrowing costs will have an adverse affect on many companies. High volume selling by stock investors can quite often result in a downturn in both the stock market and the national economy.

Indicators of international trade are also particularly important for the Forex trader. A deficit on the trade balance, indicating that imports have exceeded exports, is usually seen to be an adverse indicator as money leaving the country to purchase goods from overseas could well have the affect of devaluing the currency. However, fundamental analysis will also indicate market expectations and these will often dictate whether a trade deficit is unfavorable. For instance, it may be the case that a county usually operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general terms, trade deficits will only affect currency prices where they are higher than the market would usually expect to see.

Each country has got its own set of economic indicators (presently there are some twenty-eight major indicators being used in the United States) and these strongly influence the financial markets. For this reason, Forex traders need to be conversant with them and study them carefully when preparing their trading strategies.

Luckily, for traders who are working on the Internet, many websites today provide an abundance of the latest information, but it is up to individual Forex traders to extract this information and then apply the principles of fundamental analysis to it before making their trading decisions.

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