Tradeopolis.com

It is frequently said that the key to profitable Forex trading is information but, while correct and timely information is indeed central to currency trading, it is the examination of this information which is the real secret. There are currently two main forms of analysis used in currency trading � fundamental analysis and technical analysis - and in this short article we are going to look at precisely what is meant by fundamental analysis.

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

Basically, fundamental analysis provides an outline of currency movements and a broad picture of economic conditions which could well affect the value of a particular currency. With this picture in mind, Forex traders will then generally move on to use technical analysis to then plot entry and exit points into the market and to add to the information gained from fundamental analysis.

The foreign exchange market is very much like any other market and is governed to a large degree by the laws of supply and demand, which are also affected by economic conditions. Two economic factors affecting supply and demand are the strength of the economy and interest rates and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the country’s trade balance.

Various economic indicators are released by governments and by other sources and are usually held to be good measures of economic health which are followed by all sections of the investment market. Nearly all economic indicators are released monthly but some are issued more often and normally weekly.

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

Interest rates are an especially important indictor as they can have either a weakening or strengthening affect on a particular currency. For instance, high interest rates may attract foreign investment which strengthens the local currency, while stock market investors generally react to rising interest rates by selling because of a belief that the higher cost of borrowing will have a harmful affect on many companies. High volume selling by stock market investors can often lead to a downturn in both the stock market and the national economy.

International trade indicators are also very important to the foreign exchange trader. A trade deficit, showing that imports have exceeded exports, is normally seen to be an adverse indicator as money leaving the country to purchase goods from overseas may well have a devaluing affect on the currency. However, fundamental analysis will also indicate the expectations of the market and these will generally dictate whether a trade deficit is unfavorable. It may be the case, for instance, that a particular county frequently operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general, a trade deficit will only affect currency prices in cases where they are higher than the market would normally expect.

Every country has got its own particular set of economic indicators (there are currently some 28 major indicators being used in the US) and these strongly influence the financial markets. For this reason, Forex traders must be aware of them and study them with great care when they are preparing their trading strategies.

Fortunately, for traders working online, many websites now provide an abundance of up-to-date information, but it is the responsibility of individual foreign exchange traders to take this information and then apply the principles of fundamental analysis to it before they make their trading decisions.

About the Author
LearingForexTradingOnline.com is the perfect place to learn the principles of Forex trading and has a growing collection of Forex articles