Getting Started with Fundamental Analysis
Getting Started with Fundamental Analysis
When formulating a trading strategy, FOREX traders nearly always turn to analysis. Technical analysis and fundamental analysis are the two main categories of FOREX research. Here we shall take a look at fundamental analysis and its application to FOREX trading.
Economic and political factors are considered in fundamental analysis as they have the potential to impact currency values. In order to stay informed about economic policies, growth rates, unemployment, and inflation, FOREX traders that use fundamental analysis rely on news sources.
To gain a bird's-eye view of the economic factors impacting a particular currency and to gain a feel for how the currency is moving overall, fundamental analysis is a common tool. In addition to basic research, most traders use technical analysis to determine when to enter and quit the market.
Supply and demand, which are influenced by economic factors, determine currency prices on the FOREX. Interest rates and economic growth are the two primary economic variables that influence demand and supply. The GDP, FDI, and trade balance all have a role in determining the economy's health.
Key Performance Markers
Academic institutions and the government both issue indicators. The whole investing industry follows these metrics because of how accurate they are as indicators of economic health. Though certain indicators are given regularly, most are released monthly.
Interest rates and foreign trade are basic indicators that are highly significant. Retail sales, the Purchasing Managers Index (PMI), producers prices, durable goods orders, and the Consumer Price Index (CPI) are among the additional indicators.
A currency's value can rise or fall in response to changes in interest rates. One positive aspect of high interest rates is that they encourage investment from outside, which in turn boosts the value of the local currency. Conversely, as interest rates rise, many stock market investors sell off their holdings on the belief that more borrowing costs will hurt a lot of companies. The national economy and stock market could take a hit if investors dump their shares.
There are a lot of moving parts that go into deciding which of these two effects would be more noticeable, but most economists can agree on how a change in interest rates will influence the economy and currency value.
When looking at international trade, a deficit in the trade balance (more imports than exports) is typically not a good sign. When a country's trade balance is negative, it indicates that its currency is losing value because of the outflow of funds to buy items manufactured in other countries. Whether or not a trade deficit is undesirable is typically determined by market expectations. The value of a country's currency already takes into account its propensity to run a trade deficit. Currencies will only be impacted by trade deficits if they exceed market expectations.
The PPI, which measures the cost of production, and the CPI, which measures the cost of living, are two additional indicators. The M2 Money Supply is a measure of the entire amount of currency, whereas the GDP is a measure of the value of all goods and services within a country.
In the US, there are 28 main indicators. Forex traders would do well to keep indicators in mind while formulating trading plans, since they can have a significant impact on the financial markets. Many websites provide up-to-date information, and many FOREX brokers include this information in their trading services.
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