Easy To Follow Introduction to Fundamental Analysis For Newcomers To Forex Trading

By: Donald Saunders

It is usually said that the secret to profitable Forex trading is information but, though accurate and timely information is indeed crucial for currency trading, it is the analysis of this information that is the real secret. There are currently two main forms of analysis used in Forex trading � technical and fundamental analysis - and in this brief article we examine precisely what is meant by fundamental analysis.

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

In essence, fundamental analysis provides an overview of currency movements together with a broad view of economic conditions which might well alter the value of a particular currency. With this view in mind, foreign currency traders will then frequently move on to use technical analysis to then plot entry and exit points into the market and to complement the information gained using fundamental analysis.

The foreign exchange market is much like other markets and is affected by the laws of supply and demand, which are also affected by economic conditions. Two economic factors that affect 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.

Many different economic indicators are published by governments and by other sources and are usually considered to be sound measures of the health of an economy that are followed by all sectors of the investment market. Most economic indicators are published once a month but some are released more often and usually weekly.

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

Interest rates are an especially important indictor as they can have a weakening or strengthening affect on a currency. High interest rates might, for example, attract foreign investment which strengthens the local currency, while stock market investors usually react to rises in interest rates by selling because of a belief that the higher cost of borrowing will have an adverse affect on many companies. High volume selling by stock market investors can quite often cause a downturn in both the stock market and the economy.

Indicators of international trade are also especially important for the foreign exchange trader. A shortfall on the trade balance, indicating that exports levels are below those for imports, is usually seen to be an unfavorable indicator as money flowing out of the country to purchase goods from overseas might well have a devaluing affect on the currency. However, fundamental analysis will also give an indication of market expectations and these will normally dictate whether or not a trade deficit is unfavorable. It might be the case, for example, that a county frequently operates on a trade deficit and that this fact has already been taken into consideration in fixing the price of its currency. In general, a trade deficit will only affect currency prices where they are higher than the market would normally expect.

Every country will have its own set of economic indicators (currently there are some twenty-eight major indicators in use within the United States) and these strongly influence the financial markets. As a result, Forex traders must be aware of them and examine them with great care when they are preparing their trading strategies.

Fortunately, for those traders who are working online, many websites today carry a wealth of the latest information, but it is up to individual Forex traders to take this information and then apply fundamental analysis to it before they make their trading decisions.