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Introduction To Fundamental Analysis: Forex
By: John Sanderson iSnare Expert Author
FOREX traders almost always rely on analysis to make plan their trading
strategies. There are two basic types of FOREX analysis – technical and
fundamental. This article will look at fundamental analysis and how it used in
FOREX trading.
Fundamental analysis refers to political and economic conditions that may affect
currency prices. FOREX traders using fundamental analysis rely on news reports
to gather information about unemployment rates, economic policies, inflation,
and growth rates.
Fundamental analysis is often used to get an overview of currency movements and
to provide a broad picture of economic conditions affecting a specific currency.
Most traders rely on technical analysis for plotting entry and exit points into
the market and supplement their findings with fundamental analysis.
Currency prices on the FOREX are affected by the forces of supply and demand,
which in turn are affected by economic conditions. The two most important
economic factors affecting supply and demand are interest rates and the strength
of the economy. The strength of the economy is affected by the Gross Domestic
Product (GDP), foreign investment and trade balance.
Indicators
Various indicators are released by government and academic sources. They are
reliable measures of economic health and are followed by all sectors of the
investment market. Indicators are usually released on a monthly basis but some
are released weekly.
Two of the most important fundamental indicators are interest rates and
international trade. Other indicators include the Consumer Price Index (CPI),
Durable Goods Orders, Producer Price Index (PPI), Purchasing Manager's Index
(PMI), and retail sales.
Interest Rates - can have either a strengthening or weakening effect on a
particular currency. On the one hand, high interest rates attract foreign
investment which will strengthen the local currency. On the other hand, stock
market investors often react to interest rate increases by selling off their
holdings in the belief that higher borrowing costs will adversely affect many
companies. Stock investors may sell off their holdings causing a downturn in the
stock market and the national economy.
Determining which of these two effects will predominate depends on many complex
factors, but there is usually a consensus amongst economic observers of how
particular interest rate changes will affect the economy and the price of a
currency.
International Trade – Trade balance which shows a deficit (more imports than
exports) is usually an unfavourable indicator. Deficit trade balances means that
money is flowing out of the country to purchase foreign-made goods and this may
have a devaluing effect on the currency. Usually, however, market expectations
dictate whether a deficit trade balance is unfavourable or not. If a county
habitually operates with a deficit trade balance this has already been factored
into the price of its currency. Trade deficits will only affect currency prices
when they are more than market expectations.
Other indicators include the CPI – a measurement of the cost of living, and the
PPI – a measurement of the cost of producing goods. The GDP measures the value
of all goods and services within a country, while the M2 Money Supply measures
the total amount of all currency.
There are 28 major indicators used in the United States. Indicators have strong
effects on financial markets so FOREX traders should be aware of them when
preparing strategies. Up-to-date information is available on many websites and
many FOREX brokers supply this information as part of their trading service.
About the Author:
This article provided courtesy of http://www.about-forex.net |
