Lesson #7: Fundamental Forex Analysis
One of the most fundamental aspects of forex trading is creating a strategy that is effective, easy to implement, and based on an attentive analysis of the market. The most important element of the above three is the analysis of the market since it supports the other two elements and can determine how much profit you are going to make.
There are two main types of forex analysis, technical forex analysis and fundamental forex analysis.
Fundamental forex analysis bases the valuation of an asset (in our case a currency) on important economic reports. An example could be represented by the comparison of the employment reports of two countries. In this case, we could use the information of the reports to predict a decrease in value of the currency with the worse report and therefore to create a strategy that maximizes the earnings on the employment trend.
In fundamental forex analysis we refer to such reports as economic indicators, which can be generally considered an important source of financial data in relation to an asset. As specified earlier, in forex trading assets are currencies.
Now you might be asking yourself a simple question: I understood the meaning of fundamental forex analysis. Still, I am not an expert trader and therefore I do not know any other valuable economic indicators. Can you give me some more examples?
This is a fair question. PaxForex suggests looking at the following economic indicators while analyzing assets:
- Interest rate announcements
- Employment numbers
- Consumer price index
- Trade balance number
The importance of a given index is based on everyday news and therefore no indicator has a fixed level of importance. For instance, if you read a news report about growing inflation in the United States, the consumer prices index will acquire more importance and therefore have a big relevance in the forex market.
Fundamental forex trading is not as straight forward as it might seem since it does not lead to standard behaviors of traders. What we mean here is the fact that if there are news leading toward a certain expectation, it does not necessarily mean the market is going to move accordingly. This is due to the fact that the same news will be available to all traders and therefore the currency switches from being exposed to the news to being dependent on how traders will react to the news; which is mostly unpredictable. At the same time, predicting the right movement can represent a great source of income.
In summary, fundamental forex analysis is difficult to take advantage of in the short run, but with a good dose of experience they are going to become one of your best friend’s in forex trading.
We suggest that you start trading using the method that best fits your needs and test strategies using a demo account. PaxForex suggests that you start looking at trading patterns through technical analysis and then take a trading decision after you get the support of the indicators used in fundamental analysis.