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.
Applying these kinds of analysis in forex trading is simple if you have a forex calendar. This calendar shows the events that you should expect and the potential impact on the currency pair. It shows if the particular release will result to a strong reaction from the currency involved or it might provide hints for bigger-tier events. For example, the gross domestic product is usually followed by a large reaction in price because it shows if the economy grew or not. On the other hand, smaller-tier reports such as manufacturing production simply give hints on whether the GDP might be strong or not, and thus has limited impact on price movements.
At the end of the day, you also have to consider the long-term perspective in using fundamental analysis. This helps you gauge how long the reaction to the report will last and if it supports the general sentiment for the currency you are trading.
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.
Applying these kinds of analysis in forex trading is simple if you have a forex calendar. This calendar shows the events that you should expect and the potential impact on the currency pair. It shows if the particular release will result to a strong reaction from the currency involved or it might provide hints for bigger-tier events. For example, the gross domestic product is usually followed by a large reaction in price because it shows if the economy grew or not. On the other hand, smaller-tier reports such as manufacturing production simply give hints on whether the GDP might be strong or not, and thus has limited impact on price movements.
At the end of the day, you also have to consider the long-term perspective in using fundamental analysis. This helps you gauge how long the reaction to the report will last and if it supports the general sentiment for the currency you are trading.
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