An Introduction To Fundamental Analysis Aimed At Newcomers To The World Of Forex Trading
It is often said that information is the secret to successful Forex trading but, although accurate and up-to-date information is indeed essential for currency trading, it is the analysis of this information that is the true secret. There are currently two main types of analysis which are used in Forex trading � fundamental analysis 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 scrutinizes both economic and political conditions that might have an affect upon currency prices and Forex traders who use fundamental analysis rely upon news reports for information about a whole range of things including growth rates, inflation, economic policy and rates of unemployment.
In essence, fundamental analysis gives an outline of currency movements and a broad view of economic conditions that could well affect the value of a particular currency. With this view in mind, foreign currency traders will then often go on to use technical analysis to then plot entry and exit points into the market and to complement the information gained from fundamental analysis.
The foreign currency market is much like any other market and is governed to a large degree by the forces of supply and demand, which are themselves affected by economic conditions. Two of the most important economic factors that affect supply and demand are the strength of the economy and interest rates and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the country's balance of trade.
A whole variety of economic indicators are released by governments and other sources and are normally considered to be sound measures of the health of an economy that are followed by all sections of the investment market. Almost all economic indicators are released monthly but some are released more often and normally weekly.
Two of the most important fundamental indicators are international trade figures and interest rates, but other very useful indicators include the durable goods orders, purchasing manager's index (PMI), consumer price index (CPI), producer price index (PPI) and retail sales.
Interest rates are a particularly
important indictor as they can have a weakening or strengthening affect on a particular currency. For example, high interest rates may attract foreign investment which strengthens the local currency, while stock market investors normally react to increases in interest rates by selling in the belief that the higher cost of borrowing will have a bad affect on many companies. High volume selling by stock market investors can quite often lead to a downturn in both the stock market and the national economy.
Indicators of international trade are also especially important to the foreign currency trader. A shortfall on the trade balance, showing that exports levels are below those for imports, is normally seen as an unfavorable indicator as money flowing out of the country to buy goods from overseas may well have the affect of devaluing the currency. However, fundamental analysis will also provide an indication of the expectations of the market and these will often determine whether a trade deficit is unfavorable. It could be the case, for example, that a particular county often operates on a trade deficit and that this fact has already been taken into consideration in fixing the price of its currency. In general terms, a trade deficit will only affect currency prices in cases where they are above the level that the market would usually expect to see.
Each country has got its own particular set of economic indicators (at this time there are some 28 major indicators being used in the US) and these strongly influence the financial markets. For this reason, Forex traders need to be conversant with them and study them with great care when they are preparing their trading strategies.
Luckily, for traders who are working on the Internet, many sites now provide an abundance of up-to-date information, but it is up to individual foreign exchange traders to extract this information and then apply the principles of fundamental analysis to it before making their trading decisions.
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