Using Fundamental Analysis in Forex Trading

 


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How do FOREX traders plan their strategies? What do they rely on to make their trading plans? Analysis. Both Technical and Fundamental Analysis. Let’s look at how Fundamental Analysis is used in FOREX trading. This is an analysis of the economic and political conditions that are prevalent which might have an effect – positive or negative on currency prices. It is an analysis of so many factors – economic policies, the inflation rate, growth rate and they all go into reports that traders use to give their trading a better edge.

How do traders use Fundamental Analysis? They use it essentially to plot their entry and exit points into the market. They can only do this well if they have a broad overview of the conditions that affect that particular currency. The forces of supply and demand that have an effect on currency prices are influenced a great deal by the economic environment around them, the most important factors being how strong the economy is and what its interest rates are. The strength of the economy in turn is a reflection of the amount of foreign investment, the GDP and the trade balance.

A clearer picture emerges looking at the Indicators that are released periodically in a country. Two main ones are international trade and interest rates. In international trade, a deficit balance would be an unfavorable indicator as it would show that there are more imports than exports. This means that there is more money going out than coming in and this could have a negative effect on the value of the currency. Here, of course, there could be exceptions as some countries do operate on deficit balances and this has already been taken into account as far as their currency valuation goes.

How do interest rates affect currencies? This operates in a rather complex way. Very often one finds that high rates bring in foreign investment but also see a selling-off of holdings. So a potential strengthening of the currency could be offset by the stock market plummeting. How, then, does one arrive at any kind of consensus about which way things can go? Economic watchdogs generally use their nose guided by past experience and trends.

Other indicators that are also used include Durable Goods Orders, the Consumer Price Index (CPI), Retail Sales and Purchasing Manager's Index (PMI). The other factors that add to the overall economic picture are the GDP or the Gross Domestic Product which is a total valuation of all the services and goods in any country and the Money2Money Supply which is the value of all the currency in that market.

Indicators are released at periodic intervals. They could be weekly or monthly. The US has a total of 28 main ones. These are invaluable for traders when they formulate their strategies.

To find out more about technical analysis and trading on margin visit http://www.fx-trading-guide.com

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