Forex Trading: Fundamental Analysis
In foreign currency trading, fundamental analysis is a way of gauging how currency prices might react to changes in the “fundamentals”. There are many fundamentals to analyze, including these market movers:
* Economic conditions
* Political environment, particularly with regard to stability
* Interest rates
* Supply and demand for the currency
* Government policies
* Historic performance of the currency
* International trade position — deficit or surplus
* Consumer price index (CPI)
* Gross domestic product (GDP)
Check out our reviews:
FAP Turbo Review
Forex Megadroid Review
Forex Autopilot Review
* Cost of producing goods (PPI)
Who watches these fundamentals and releases the information about them? The central banks of each country are responsible for the economy of the country, so they carefully watch the factors that affect it: the fundamentals. The factors are announced by the central banks regularly, sometimes monthly but often weekly, and the exact time of these announcements is known in advance. Another term for these factors is “indicators”, which you will hear often in forex trading.
Click here for more on forex fundamental analysis
It’s important to understand that there is always a certain expectation of these indicators before they are announced, and currency traders are positioned in the forex market accordingly. If the announcement shows the indicator to be much as expected, there will be little or no movement in the currency.
On the other hand, if these expectations are not what actually occur, currency prices will definitely move. This is the basis of forex fundamental analysis, and many traders rely on it exclusively. I personally, however, recommend a combination of fundamental and technical analysis.
The European Union’s ECB, the U.S. FED, the U.K. BOE and the Japanese BOJ have the most influence of all the central banks. Forex traders are wise to pay attention to these bodies in their trading.
The biggest impact on the forex market is, not surprisingly, created by U.S. indicators. Although the ECB indicators have less impact, they can make a difference when they are different from what the market expected. Two of the major economic drivers that affect the forex market are interest rates and inflation, so listen carefully when knowledgeable financial experts talk about them.
Forex fundamental analysis is made all the more complicated because accurate measurement of the variables and their relationships is difficult. Historical experience is the basis of estimates of the fundamentals. On the opposite side, assumptions are often made on the basis of what’s happening in world news, such as wars, inflation, major political changes, etc. They are, however, only assumptions and they may not happen as expected. It can take a while for the markets to adjust to the reality.
There’s nothing more fundamental than supply and demand, and that certainly holds true in the forex market. If currency prices remain at the same level despite a decrease in demand, eventually the price will increase. The opposite also holds true: if demand stays the same while prices have increased, eventually the price will decrease.
This is a very basic explanation of forex fundamental analysis.
To claim your free 7-part forex mini-course, click here.
From The Archive
