What is Forex fundamental analysis?
The Forex fundamental analyst identifies and
measures factors that determine the intrinsic value of a financial
instrument, such as the general economic and political environment, and
including any that affect supply and demand for the underlying product or
service. If there is a decrease in supply but the level of demand remains
the same, then there will be an increase in market prices. An increase in
supply produces the opposite effect.
For example, an analyst for a given currency studies the supply and demand
for the country's currency, products or services (Merchandise Trade); its
management quality and government policies; its historic and forecasted
performance; its future plans and the most important for the shorter term,
all the economic indicators.
From this data, the analyst constructs a model to determine the current
and forecasted value of a currency against an other. The basic idea is
that unmatched increases in supply tend to depress the currency value,
while unmatched increases in demand tend to increase the currency value.
Once the analyst estimates intrinsic value, he compares it to the current
exchange rate and decides whether the currency ought to rise or fall.
One difficulty with fundamental analysis is accurately measuring the
relationships among the variables. Necessarily, the analyst must make
estimates based on experience. In addition, the Forex markets tend to
anticipate events and discount them in the currency value in advance.
Finally, serving as both a disadvantage and even as an advantage
(depending upon the timing), the markets often take time to recognise that
exchange rates are out of line with value.
Fundamental Analysis On Forex Trading
It has become imperative for every Forex
trader to learn how to predict the price trend and which method or
software is the best.
When you do Forex trading, it is very important to understand the
difference between fundamental analysis and technical analysis. A quick
explanation of the difference among the two types of analysis is:
fundamental analysis focuses on money policy, government policy and
economic indicators such as GDP, exports, imports etc within a business
cycle framework while technical analysis focuses on price action and
market behavior, especially on chart and technical indicators.
Needless to say both schools are equally disparaging about the other, and
both believe their techniques are infinitely superior. But the reality is
that it has become increasingly difficult to be a purist of either
persuasion. Fundamentalists need to keep an eye on the various signals
derived from the price action on charts, while few technicians can afford
to completely ignore impending economic data, critical political decisions
or the myriad of societal issues that influence prices.
Generally speaking, fundamental analysis can only judge which direction
the market will move, and technical analysis can supply both direction and
rough currency rate.
Keeping in mind that the financial underpinnings of any country, trading
bloc or multinational industry takes into account many factors, including
social, political and economic influences, staying on top of an extremely
fluid fundamental picture can be challenging. Meanwhile, forecasting
models are as numerous and varied as the traders and market buffs that
create them. Different people can look at the exact same data and come up
with two completely different conclusions about how the market will be
influenced by it. At the end, some may make huge profit and some lose
their money. You can not say fundamental analysis is easy.
Remember, fundamental analysis is a very effective way to forecast
economic conditions, but not necessarily exact market prices. For example,
when analyzing an economist's forecast of the upcoming GDP or employment
report, you begin to get a fairly clear picture of the general health of
the economy and the forces at work behind it. However, you'll need to come
up with a precise method as to how best to translate this information into
entry and exit points for a particular trading strategy.
Tip: If you are new to do Forex
trading and do not trade frequently, you can mainly use fundamental
analysis for your trading.
Don't disturb yourself by information overload. Sometimes traders fall
into this trap and are unable to pull the trigger on a trade. Normally,
your first feel is the answer for you to do Forex trading. At that time,
you are sure which currency is strong and which country's economy is good.
The more simple, the more useful.
However, trading a particular market without knowing a great deal about
the exact nature of its underlying elements is unbelievable. You might get
lucky and snare a few on occasion but it's not the best approach over the
For Forex traders, the fundamentals are everything that makes a country
tick. From interest rates and central bank policy to natural disasters,
the fundamentals are a dynamic mix of distinct plans, erratic behaviors
and unforeseen events. Therefore, it is very important to understand
fundamental analysis and use them on forex trading.