A Simple Introduction To Fundamental Analysis Aimed At Newcomers To The World Of Forex Trading

It is usually said that the basis of successful Forex trading is information but, despite the fact that correct and up-to-date information is indeed vital for currency trading, it is the analysis of this information that is the real secret. There are currently two main types of analysis which are used in currency trading � technical analysis and fundamental analysis - and here we are going to examine just what is meant by fundamental analysis.

At its simplest, fundamental analysis scrutinizes political and economic conditions that might have an affect upon currency prices and Forex traders who make use of fundamental analysis rely on news reports for information on a range of things including growth rates, economic policy, inflation and employment rates.

Basically, fundamental analysis gives an overview of currency movements and a broad picture of economic conditions which might well alter the value of a particular currency. With this picture to hand, foreign currency traders will then normally move on to make use of technical analysis to then plot entry and exit points in the market and to complement the information gained from fundamental analysis.

The Forex market is very much like other markets and is governed to a large degree by the forces of supply and demand, which are also affected by economic conditions. Two economic factors that affect supply and demand are the strength of the economy and interest rates and the strength of the economy is affected by foreign investment, the gross domestic product (GDP) and the economy's balance of trade.

Many different economic indicators are released by governments and by other sources and are generally considered to be reliable measures of economic health that are followed by all sections of the investment market. Most economic indicators are released monthly but some are released more often and generally weekly.

Two of the main fundamental indicators are international trade figures and interest rates, but other very helpful indicators include the consumer price index (CPI), purchasing manager's index (PMI), durable goods orders, producer price index (PPI) and retail sales.

Interest rates are an extremely important indictor as they can have either a weakening or strengthening affect on a particular currency. High interest rates may, for example, attract foreign investment which strengthens the local currency, while investors in the stock market usually react to rises in interest rates by selling because of a belief that the higher cost of borrowing will have an unfavorable affect on many companies. Large-scale selling by stock market investors can quite often lead to a downturn in the stock market and the economy.

Indicators of international trade are also particularly important for the Forex trader. A deficit on balance of trade, showing that exports levels are below those for imports, is generally seen to be an adverse indicator as money flowing out of the country to buy foreign goods could well have a devaluing affect on the currency. However, fundamental analysis will also give an indication of the expectations of the market and these will often dictate whether or not a trade deficit is unfavorable. For example, it might be the case that a particular county usually operates with a trade deficit and that this fact has already been taken into consideration in fixing the price of its currency. In general terms, trade deficits will only affect currency prices where they are above the level that the market would ordinarily expect to see.

Each country will have its own particular set of economic indicators (there are presently in the region of twenty-eight major indicators being used in the US) and these have a strong influence on financial markets. For this reason, Forex traders have to be aware of them and study them carefully when they are preparing their trading strategies.

Fortunately, for those traders working online, many websites now carry a wealth of up-to-date information, but it is up to individual Forex traders to extract this information and then apply the principles of fundamental analysis to it before making their trading decisions.