A Simple Introduction to Fundamental Analysis For Newcomers To Forex Trading

It is commonly said that the basis of profitable Forex trading is information but, although accurate and timely information is indeed central to foreign currency trading, it is the examination of this information which is the real secret. There are currently two main forms of analysis which are used in foreign currency trading – technical and fundamental analysis - and here we are going to examine exactly what is meant by fundamental analysis.

In its simplest form, fundamental analysis examines economic and political conditions which might affect foreign currency prices and Forex traders who use fundamental analysis rely upon news reports for information about a whole range of things including, inflation, economic policy, growth rates and rates of unemployment.

In essence, fundamental analysis provides an overview of currency movements and a broad view of economic conditions which might well affect the value of a particular currency. With this view to hand, Forex traders will then frequently go on to use technical analysis to plot entry and exit points in the market and to supplement the information gained using fundamental analysis.

The Forex market is much like other markets and is affected by the laws of supply and demand, which are also affected by economic conditions. Two of the most important economic factors which affect supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the economy's balance of trade.

Many different economic indicators are published by governments and by other sources and are generally considered to be reliable measures of the health of an economy which are followed by all sections of the investment market. Nearly all economic indicators are published once a month although some are published more often and normally weekly.

Two of the most important fundamental indicators are interest rates and international trade figures, but other extremely useful indicators include the, consumer price index (CPI), producer price index (PPI), purchasing manager's index (PMI), durable goods orders and retail sales.

Interest rates are a particularly important indictor because they can have a strengthening or weakening affect on a particular currency. High interest rates may, for instance, attract foreign investment which strengthens the local currency, while stock market investors usually react to increases in interest rates by selling because of a belief that higher borrowing costs will have a bad affect on many companies. High volume selling by stock investors can frequently result in a downturn in the stock market and the economy.

International trade indicators are also especially important for the Forex trader. A deficit on balance of trade, with export levels below import levels, is normally seen to be an adverse indicator as money leaving the country to purchase goods from overseas could well have a devaluing affect on the currency. However, fundamental analysis will also give an indication of market expectations and these will generally dictate whether a trade deficit is unfavorable. For instance, it might be the case that a particular county usually operates with a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general terms, trade deficits will only affect currency prices in cases where they are higher than the market would normally expect to see.

Every country will have its own particular set of economic indicators (currently there are some 28 major indicators being used in the US) and these strongly influence the financial markets. For this reason, Forex traders need to be conversant with them and study them carefully when they are preparing their trading strategies.

Fortunately, for traders who are working on the Internet, many sites today carry a wealth of up-to-date information, but it is the responsibility of individual foreign exchange traders to take this information and apply the principles of fundamental analysis to it in order to formulate their trading decisions.

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