How Does Forex Work – Fundamental Analysis

Forex trading: Fundamental Analysis

There are many forex trading strategies that a professional trader may choose to implement if you decide that entering the forex markets is right for you. Of course, none come with any guarantees and all carry risks: however, one of the strategies most widely preferred revolves around fundamental analysis.

With a fundamental analysis the idea is that professional traders gain a picture of the market by taking into account the factors that can influence its fluctuations, including financial, economic and political.

What influences this forex trading strategy?

Political, financial and economic factors all influence the forex markets. This is because they affect a country’s economic health and traders are able to use these factors to predict potential movements in the market. By making successful predictions, traders can move their monies accordingly and potentially benefit as a result.

With economic and political announcements made on a daily basis, the forex market is changing rapidly. Using a fundamental analysis to analyse information can boost a trader’s chances of making a successful trade.

So what factors are considered with this forex trading strategy?

Above all, the fundamental analysis forex trading strategy focuses on economic policies ranging from a country’s budget to currency distribution. Readings of budgets are vital when determining whether investing in a country’s currency is worthwhile or not. If there is a well-balanced budget, then chances are the currency’s value will increase. However, if the wealth policy of a country is not satisfactory then the country’s currency is likely to suffer as a result.

Here are some additional factors that may be part of a fundamental analysis forex trading strategy:

Deficits and surpluses: With few deficits a currency will usually be strong. This places the country in a good position to make trades and lend currency to other countries.

Durable goods: An increase in orders for durable goods will often increase economic activity. This could lead to a major lift for the currency in question.

Employment: When payroll employment falls this is seen as reflecting a drop in economic activity: and could in turn lead to a fall for interest rates and further negative impacts on a country’s currency.

Gross Domestic Product (GDP): Viewed as the number one indicator of the economic activity of a country, a high GDP figure will usually prompt a high interest rate period.

Inflation:  A rise in inflation will usually prompt a drop in the currency’s value.

Levels and trends: An active country in the trading market will have a high level of demand for a currency – and this in turn will have an impact on the currency pairs it is featured in. With a high amount of trade, the market becomes competitive: with supply and demand being one of the key factors that affects trades.

Retail sales: Indicates the strength of spending among consumers.

Speeches: Several key economic figures make speeches throughout the year which give hints about forthcoming economic policies. These announcements often have an instant impact on the forex trading market. Some of the key announcements to look out for include those from the chairman of the ECB, the European Central Bank; and the chairman of the USA’s Federal Reserve Bank.

So how should you use this fundamental analysis?

Those who have success in the forex trading markets often use an economic calendar so that they have a clear idea of when vital data will be released. Knowing what is forthcoming gives your trader a chance to predict currency moves. For example, it may want to watch for inflation indicators when a currency is weak.

Of course there can be differences between predicted results and the real results which can then prompt corrections in the market.  So paying attention to revisions of news is also very important.

Putting fundamental analysis to good use could give traders a significant advantage in the forex markets: just remember that there are no guarantees and you should seek independent advice before considering investment. To find out more about Unite’s recommended forex partner, simply follow this link now.

PLEASE NOTE: These guides are meant to offer a general outline of some key forex-related areas. They are not to be constituted as financial advice and the strategies should only be considered by professional traders in selected circumstances. If you are considering entering the forex trading markets, seek independent financial advice first.