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Most FOREX traders rely on analysis to make plan their trading strategy. This article will discuss fundamental analysis. The other common form of analysis is technical analysis. After reading this article you should have a superior understanding of fundamental analysis and how to use it as part of your FOREX strategy.

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.

Fundamental analysis will wage you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Just like most markets the FOREX market is controlled by supply and demand. Many economic factors can affect the supply and demand but the two most critical ones are interest rates and the strength of the economy. The over all strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.

There are many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all traders.

There are many indicators that are released but some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

Interest Rates – can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade – If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to purchase foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.

In the US alone there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the world wide web and is provided by many brokers.

Most of Us Are Doing Fundamental Analysis Each and Each Day When We Ask: ‘How’s It Going?’

Any smart trader knows that in order to be successful they must be healthy to examine the market and predict price movement. This is
true whether you trade in stocks, bonds, commodities, currency, or any other security.

Analysis can be done in two different ways: ‘fundamental analysis’ and ‘technical analysis’.

Technical analysis is the study of price fluctuation.. The aim is to examine the history of price movement in an effort to predict future prices. This involves establishing ’support’, ‘resistance’, trends, and volume in the marketplace.

Fundamental analysis is the study of current events and the nation’s overall health of the economy as well as interest rates, the money supply and the inflow and outflow of currency into the country. The basic  intent 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 adopt 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 simple task. There are many factors to consider, and different
traders might 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 examine are the
interest rate, unemployment rate, consumer price index, and gross domestic product (GDP).  Interest rates have great influence on the inflow of foreign capital. The higher the rate, the more desirable to invest in the US.

These reports are released regularly by various government agencies and non-government entities. You should find the latest schedule of upcoming
releases and place 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 forecast.

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

A major disadvantage of fundamental analysis is that it can be too much of a “big picture”. And particularly the timing of the forecasts. We know this day that with all the government spending, there will be inflation. But, when will that arrive? Next month? Or next year? The experts are divided on the subject proving that they just don’t know. Fundamentals are  great for predicting overall economic growth and price changes, but they don’t offer enough detail to target specific entry and exit points.

This is where technical analysis shines as a short term predictor.