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Posted on September 20, 2007 by Donald Saunders | Posted under Finance
An Easy Introduction to Fundamental Analysis For The Apprentice Forex Trader
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In its simplest form, fundamental analysis examines both economic and political conditions which could have an affect upon foreign currency prices and Forex traders who make use of fundamental analysis rely upon news reports for information on a whole range of things including economic policy, inflation, growth rates and rates of unemployment. Basically, fundamental analysis gives an overview of currency movements and a broad view of economic conditions that might well affect the value of a specific currency. With this view to hand, foreign currency traders will then frequently move on to make use of technical analysis to then plot entry and exit points into the market and to augment the information gained using fundamental analysis. The foreign exchange market is much like other markets and is governed to a large degree by the forces of supply and demand, which are themselves affected by economic conditions. Two of the most important economic factors affecting supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by foreign investment, the gross domestic product (GDP) and the country's trade balance. Various economic indicators are published by governments and by other sources and are generally considered to be reliable measures of economic health which are followed by all sections of the investment market. The majority of economic indicators are published monthly but a few are issued more frequently and normally weekly. Two of the principle fundamental indicators are interest rates and international trade figures, but other very helpful indicators include the durable goods orders, consumer price index (CPI), producer price index (PPI), purchasing manager's index (PMI) and retail sales. Interest rates are a very important indictor because they can have a weakening or strengthening affect on a currency. High interest rates could, for instance, attract foreign investment and strengthen the local currency, while investors in the stock market 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. Large-scale selling by stock investors can quite often lead to a downturn in both the stock market and the national economy. Indicators of international trade are also particularly important to the foreign exchange trader. A trade deficit, indicating that imports have exceeded exports, is normally seen to be an unfavorable indicator as money flowing out of the country to purchase foreign goods could well have the affect of devaluing the currency. However, fundamental analysis will also point up market expectations and these will normally determine whether or not a trade deficit is unfavorable. It may be the case, for instance, that a county frequently operates with a trade deficit and that this has already been factored into the price of its currency. Generally, trade deficits will only affect currency prices in cases where they are above the level which the market would usually expect to see. Each country has got its own set of economic indicators (there are presently some twenty-eight major indicators used in the United States) and these have a strong influence on financial markets. For this reason, Forex traders have to be aware of them and examine them carefully when they are preparing their trading strategies. Luckily, for those traders working online, many sites today carry a wealth of the latest information, but it is up to individual foreign currency traders to take this information and then apply fundamental analysis to it to make their trading decisions. About The Author: LearingForexTradingOnline.com is the perfect place to learn Forex trading online and has a growing collection of foreign currency trading articles |
Tags: FOREX, FOREX TRADING, CURRENCY TRADING, CURRENCY MARKETS, FUNDAMENTAL ANALYSIS, TECHNICAL ANALYSIS
