Wednesday, April 03, 2013

Forex traders mainly use two main types of analyses for their trading strategies: technical and fundamental analysis. This short article will focus on fundamental analysis, with special emphasis on how to use it in forex trading.

Fundamental analysis refers to political and economic conditions which can influence the prices of currency pairs. Forex traders who use fundamental analysis base their decisions on information such as unemployment rates, economic policy, inflation, growth rates, etc.

Fundamental analysis is often used to get an overall view of currency movements. It provides a general evaluation of economic conditions which affect a given currency. Most forex traders count on fundamental analysis to find entry and exit points on the currency market and they complete their analysis with fundamental analysis.

Currency prices on the Forex are affected by supply and demand forces that are influenced by the economic situation. 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 GDP (gross domestic product), foreign investments and the balance of exports/imports.

Economic indicators

Various economic indicators are announced by government and university sources. These are reliable measurements of the country’s economic health which are monitored by all investment sectors. The indicators are generally published on a monthly basis but some are published each week.

Two of the most important fundamental indicators are the central banks’ interest rates and the balance of imports/exports. There are of course a multitude of important indicators (consumer price index, durable good orders, production price index, retail sales, etc.).

Interest rates – high interest rates attract foreign investments which will reinforce the local currency. In addition, stock market investors often react to interest rate increases by selling off stocks since they believe the increased cost of borrowing money will affect many companies. Stock market investors may sell their shares, which will slow down the stock market and the national economy.

Determining which of these two effects dominates depends on many complex factors, but there is a general consensus that exists among economic observers in terms of the way in which interest rate changes affect an economy and the price of a currency.

The export/import balance – A trade balance that shows a deficit (more imports than exports) is generally unfavorable for a country’s economy. A deficit trade balance means that money circulating in the country is being used to buy goods made abroad, which can have an unfavorable effect on a currency. Typically, market expectations determine whether a deficit trade balance is unfavorable or not. The trade balance will affect currency prices if the figure that is announced is higher than expected.

There are 28 main indicators used in the United States. Economic indicators have important effects on the financial markets, so forex traders must take these economic announcements into account when defining their trading strategies. The economic statistic calendar provides traders with announcements in real time.

source : HotForex



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