An Easy Introduction to Fundamental Analysis Written For The Apprentice Forex Trader

by Donald Saunders

It is often said that information is the basis of profitable Forex trading but, despite the fact that accurate and up-to-date information is indeed essential for currency trading, it is the examination of this information that is the true secret. There are currently two main types of analysis which are used in Forex trading � fundamental and technical analysis - and in this short article we are going to look at precisely what is meant by fundamental analysis.

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

In essence, fundamental analysis gives an overview of currency movements together with a broad view of economic conditions that may well affect the value of a specific currency. With this view in mind, foreign currency traders will then generally move on to use technical analysis to plot entry and exit points into the market and to supplement the information gained through fundamental analysis.

The Forex market is much like any other market and is governed to a large degree by the forces of supply and demand, which are also affected by economic conditions. Two of the most important economic factors that affect 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 economy's trade balance.

A whole variety of economic indicators are released by governments and other sources and are usually considered to be reliable measures of economic health that are followed by all sectors of the investment market. Nearly all economic indicators are released monthly but some are released more often and normally weekly.

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

Interest rates are a very important indictor because they can have either a strengthening or weakening affect on a particular currency. For instance, high interest rates could attract foreign investment and strengthen the local currency, while stock market investors usually react to rising interest rates by selling because of a belief that higher borrowing costs will have a harmful affect on many companies. Large-scale selling by stock investors can quite often cause a downturn in both the stock market and the national economy.

International trade indicators are also extremely important for the Forex trader. A shortfall on balance of trade, with export levels below import levels, is normally seen to be an unfavorable indicator as money leaving the country to buy foreign goods could well have a devaluing affect on the currency. However, fundamental analysis will also give an indication of the expectations of the market and these will normally dictate whether or not a trade deficit is unfavorable. It might be the case, for instance, that a particular county frequently operates on a trade deficit and that this fact has already been taken into consideration in fixing the price of its currency. Generally, a trade deficit will only affect currency prices where they are higher than the market would ordinarily expect.

Every country has its own particular set of economic indicators (there are presently in the region of twenty-eight major indicators being used in the US) and these strongly influence the financial markets. For this reason, Forex traders have to be conversant with them and examine them with great care when preparing their trading strategies.

Luckily, for those traders working on the Internet, many sites today provide an abundance of up-to-date information, but it is up to individual Forex traders to extract this information and apply the principles of fundamental analysis to it in order to formulate their trading decisions.

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