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In forex trading, there are two main types of analysis: fundamental and technical. This article will focus on what fundamental analysis is all about, which tools will help you conduct fundamental analysis, and how it can be applied to catching profits in the currency market.
Fundamentals or fundamental analysis is all about looking at factors, whether its economic or political, that could influence the price of a currency. In particular, fundamental analysis experts tend to zoom into the economic factors and data that can show if a country is doing well or not. With that, economic releases tend to have a huge impact on forex price movements since these show if the rate of return on the currency will increase or decrease and if demand will climb or fall.
To be specific, traders usually look at the release of top-tier economic data. These are the GDP (gross domestic product), CPI (consumer price index), and other economic reports that give a bigger-picture view of how the economy is faring. On top of that, forex traders also keep tabs on central bank interest rate decisions because these directly impact the rate of return and demand for a currency. When the central bank plans to hike rates or actually does so, the return and demand for the local currency increase, which leads to a rise in price. On the other hand, when a central bank plans to cut rates or actually does so, this results to a decrease in return and demand for a currency, which then translates to a lower price.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
Fundamentals or fundamental analysis is all about looking at factors, whether its economic or political, that could influence the price of a currency. In particular, fundamental analysis experts tend to zoom into the economic factors and data that can show if a country is doing well or not. With that, economic releases tend to have a huge impact on forex price movements since these show if the rate of return on the currency will increase or decrease and if demand will climb or fall.
To be specific, traders usually look at the release of top-tier economic data. These are the GDP (gross domestic product), CPI (consumer price index), and other economic reports that give a bigger-picture view of how the economy is faring. On top of that, forex traders also keep tabs on central bank interest rate decisions because these directly impact the rate of return and demand for a currency. When the central bank plans to hike rates or actually does so, the return and demand for the local currency increase, which leads to a rise in price. On the other hand, when a central bank plans to cut rates or actually does so, this results to a decrease in return and demand for a currency, which then translates to a lower price.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
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