Fundamental Analysis In Forex Trading

Fundamental Analysis In The Forex Market

Any smart forex trader knows that in order to be successful they must be able to analyze the market and predict price movement. This is true whether you trade in stocks, bonds, commodities, currency, or any other for of security. Here we are only concerned with forex trading.

Analysis can be done in two different ways:

fundamental analysis and technical analysis.

Technical analysis is the study of prices. The goal is to analyze the history of price movement in an effort to predict future prices.

Fundamental analysis is the study of a nation's overall economic health. I like to think of this as "Big Picture" analysis. The idea is that the strength of a nation's economy will affect the supply and demand for its currency, which will in turn affect the price of the currency.

For example, let's assume that the US economy is in a major upswing. Since the economy is strong, the value of the dollar will be expected to rise and currency traders will invest heavily in the dollar. This bullish behavior becomes a self-fulfilling prophecy and the dollar rises in value.

That's a pretty simple concept, but judging the health of a nation's economy is no easy task. There are many factors to consider, and twotraders may look at the same figures and interpret the data differently.

Fundamental analysts look at various economic indicators for signs of an economies strength. Some of the indicators they analyze are the interest rate, unemployment rate, consumer price index, and gross domestic product (GDP).

These reports are released regularly by various government agencies and non-government entities. You should find the latest schedule of upcoming releases and put them on your calendar. Keep an eye on them for a few months and see what effect they have on currency prices.

One thing to keep in mind: it is not always the numbers contained in a report that have the greatest impact, but rather the relation of the numbers compared to what was forecasted.

In other words, a rise in interest rates may not have a significant impact if forecasters were expecting it. But if they were expecting interest rates to remain steady and there was an unexpected increase, there may be a large impact on currency prices.

A major disadvantage of fundamental analysis is that it can be a little too "big picture". It is great for predicting overall economic growth and price changes, but it doesn't offer enough details to target specific entry and exit points. This is where technical analysis comes in.

For more information on Fundamental Analysis see here.