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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.