An Uncomplicated Introduction To Fundamental Analysis Aimed At Newcomers To The World Of Forex Tradi

By Author: Donald Saunders
Total Articles: 84
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It is frequently held that information is the key to profitable Forex trading but, although correct and timely information is indeed crucial for foreign currency trading, it is the analysis of this information which is the real key. There are currently two main types of analysis which are used in foreign currency trading � fundamental and technical analysis - and in this short article we are going to examine exactly what is meant by fundamental analysis.

In its simplest form, fundamental analysis scrutinizes political and economic conditions which might have an affect upon foreign currency prices and Forex traders who make use of fundamental analysis rely on news reports for information about a range of things including inflation, growth rates, economic policy and rates of unemployment.

Basically, fundamental analysis provides an overview of currency movements together with a broad view of economic conditions which could well affect the value of a specific currency. With this view to hand, foreign currency traders will then frequently go on to make use of technical analysis to plot entry and exit points ...
... in the market and to augment the information gained through fundamental analysis.

The foreign currency 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 the strength of the economy and interest rates and the strength of the economy is affected by foreign investment, the gross domestic product (GDP) and the economy's trade balance.

Many different economic indicators are released by governments and by other sources and are generally considered to be good measures of economic health which are followed by all sectors of the investment market. Nearly all economic indicators are released monthly but a few are published more frequently and normally weekly.

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

Interest rates are a very important indictor as they can have a weakening or strengthening affect on a currency. For instance, high interest rates may attract foreign investment and strengthen the local currency, while investors in the stock market normally react to rises in interest rates by selling because of a belief that the higher cost of borrowing will have a bad affect on many companies. Large-scale selling by stock investors can often result in a downturn in the stock market and the national economy.

International trade indicators are also very important for the foreign currency trader. A trade deficit, with export levels below import levels, is normally seen to be an adverse indicator as money leaving the country to purchase goods from overseas may well have the affect of devaluing the currency. However, fundamental analysis will also indicate market expectations and these will normally dictate whether or not a trade deficit is unfavorable. For instance, it may be the case that a county frequently operates on a trade deficit and that this fact has already been taken into consideration in fixing the price of its currency. In general, trade deficits will only affect currency prices where they are above the level which the market would ordinarily expect.

Each country has got its own set of economic indicators (currently there are in the region of 28 major indicators used in the United States) and these have a strong influence on financial markets. As a result, Forex traders have to be conversant with them and examine them carefully when preparing their trading strategies.

Fortunately, for those traders who are working online, many sites now provide an abundance of up-to-date information, but it is up to individual foreign currency traders to extract this information and apply fundamental analysis to it in order to formulate their trading decisions.