When you are involved in foreign exchange (Forex) trading, an important factor to keep in mind is that currencies and exchange rates are not uninfluenced by social, economic and environmental factors. This is essentially what fundamental analysis in Forex trading focuses on.
Information gathered from sources like the daily news regarding the status of politics, internal relations, natural disasters and other worldly events can be indicative of what may be coming up in the Forex market. These factors can assist a trader in identifying ideal times to trade currency matches or hold on to certain currencies. Even more general socioeconomic factors such as unemployment rates, fiscal policies, inflation and stock markets can foreshadow a strengthening or weakening currency.
At its core fundamental analysis in the Forex market studies the causes of the movements of currencies. However, it is not an analysis that is particularly meaningful used on its own. Traders often use fundamental analysis as a back up to support a trade that looks positive through a technical analysis.
So, more specifically, here are some of the sources and the factors you should consider when performing a fundamental analysis:
Key Political Figures: Speeches from key figures in the financial and economic government departments is often a reliable source of information in analyzing a currencies position and potential future movements. Also data and reports released publicly by these departments often highlight areas of strength and concern.
Interest Rates: Increases in interest rates often reflect intentions to reinvest in ones own economy. Such an increase encourages investors to shift their assets to that country for higher returns.
Employment/Unemployment: Increases in unemployment levels is often interpreted as a sign of a weak economy. The employment level is important indicator, as this will affect the interest rates and thus the strength of the given currency.
Trade Balance & Budgets: The level of a country's trade deficit will impact the strength of its currency. A significant trade deficit is indicative of a weak currency as this encourages higher levels of selling then buying into the currency.
Gross Domestic Product (GDP): Reported on quarterly, the GDP is an important indicator of the strength of a currency. A high GDP often precedes a high interest rate, which is a good sign for currencies.
Retail Sales: Consumer expenditure is initially represented in retail sales levels. High retail sales and consumer expenditure can reflect a stable economy with a strengthening currency.
When this information has been gathered, the following tips will assist you in helping to interpret and stay abreast of currency movements:
- Identify the indicator (as above) that is gaining the most attention, this will likely foreshadow the future price moves.
- When differences between expected and actual movement occur, watch out for the corrections in the price move.
- Pay attention to the new reviews, changes in the market tend to occur rapidly
It is also important to be aware that whenever any of these key factors are announced or occur, some brokers may close or slow down new trading orders. This is why it can be critical for a successful trader to identify the potential for such movements and get in before the "major action" begins. Missing the trade opportunity can be frustrating for a trade and should be avoided wherever possible using these analysis techniques.
Information gathered from sources like the daily news regarding the status of politics, internal relations, natural disasters and other worldly events can be indicative of what may be coming up in the Forex market. These factors can assist a trader in identifying ideal times to trade currency matches or hold on to certain currencies. Even more general socioeconomic factors such as unemployment rates, fiscal policies, inflation and stock markets can foreshadow a strengthening or weakening currency.
At its core fundamental analysis in the Forex market studies the causes of the movements of currencies. However, it is not an analysis that is particularly meaningful used on its own. Traders often use fundamental analysis as a back up to support a trade that looks positive through a technical analysis.
So, more specifically, here are some of the sources and the factors you should consider when performing a fundamental analysis:
Key Political Figures: Speeches from key figures in the financial and economic government departments is often a reliable source of information in analyzing a currencies position and potential future movements. Also data and reports released publicly by these departments often highlight areas of strength and concern.
Interest Rates: Increases in interest rates often reflect intentions to reinvest in ones own economy. Such an increase encourages investors to shift their assets to that country for higher returns.
Employment/Unemployment: Increases in unemployment levels is often interpreted as a sign of a weak economy. The employment level is important indicator, as this will affect the interest rates and thus the strength of the given currency.
Trade Balance & Budgets: The level of a country's trade deficit will impact the strength of its currency. A significant trade deficit is indicative of a weak currency as this encourages higher levels of selling then buying into the currency.
Gross Domestic Product (GDP): Reported on quarterly, the GDP is an important indicator of the strength of a currency. A high GDP often precedes a high interest rate, which is a good sign for currencies.
Retail Sales: Consumer expenditure is initially represented in retail sales levels. High retail sales and consumer expenditure can reflect a stable economy with a strengthening currency.
When this information has been gathered, the following tips will assist you in helping to interpret and stay abreast of currency movements:
- Identify the indicator (as above) that is gaining the most attention, this will likely foreshadow the future price moves.
- When differences between expected and actual movement occur, watch out for the corrections in the price move.
- Pay attention to the new reviews, changes in the market tend to occur rapidly
It is also important to be aware that whenever any of these key factors are announced or occur, some brokers may close or slow down new trading orders. This is why it can be critical for a successful trader to identify the potential for such movements and get in before the "major action" begins. Missing the trade opportunity can be frustrating for a trade and should be avoided wherever possible using these analysis techniques.
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