Forex traders use two types of analysis to predict the behavior of currency prices - fundamental and technical.
What is fundamental analysis and why does it deserve close attention?
Fundamental analysis of the Forex financial market is based on an assessment of important international economic reports. Traders study release numbers and compare them, draw conclusions, which are then used in their trading strategies.
To make a profitable trade, the fundamental analyst should always be aware of all the most important economic news (national and international), giving them the correct rating and applying them in their trading strategy.
What are the main indicators of Forex fundamental analysis?
Economic performance is an important piece of financial information for assets. In the Forex market assets are currencies of different countries. For any country, there are a number of important economic indicators.
The main indicators that every trader should consider when doing a fundamental analysis:
• the base rate of the national currency;
• employment rate;
• unemployment rate;
• GDP level;
• consumer price index;
• inflation rate;
• indicators of the country's trade balance.
While some economic reports contain very valuable information for fundamental Forex analysis, others are less important and have little effect on changes in the Forex market. For example, if a country is experiencing strong economic growth and low inflation, this information can significantly affect the growth of the exchange rate of the currency of this country. While economic growth by itself does not always contribute to a similar movement of the national currency.
How to do fundamental analysis effectively?
Fundamental analysis examines the main factors that influence the behavior of a particular asset, such as stocks or Forex currencies. It tries to predict the price as well as trends, simply by analyzing economic indicators, government policy, social and other factors in a continuous business cycle.
If we compare the work of financial markets with the clock, then fundamental analysis is the mechanisms, as well as the springs that move the hands of the clock. Anyone can tell what time is it now, but only a fundamental analyst knows about internal work and its mechanisms, which moves the hands of clocks from specific events to specific figures of the exchange rate of a particular currency.
Fundamental analysis is incredibly effective in predicting the economic conditions affecting the behavior of currencies. Studying GDP projections or possibly employment publications can give you a fairly clear idea of the state of the economy and the financial opportunities behind this data. But you still need a strategy to translate this data into specific entry numbers, as well as a profitable exit from the market.
Filling the gap between fundamental data and a specific Forex trading strategy usually depends on the personal approach of the Forex trader.
Fundamental analysis includes everything that constitutes the “anatomy” of the economy of a particular country and directly or indirectly affects it: from interest rate levels to natural disasters. The basic principle is a dynamic combination of various indicators, political events and the results of natural disasters.
However, if you are a novice trader, you should not analyze too many indicators. To start a successful Forex trading it will be well enough to learn a few important indicators. In addition, daily published fundamental analysis with trading recommendations can very well help you both in trading and in understanding the mechanisms of action of the fundamental analysis of the financial market.
