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Most FOREX traders rely on analysis to make plan their trading strategy. This article will discuss fundamental analysis. The other common form of analysis is technical analysis. After reading this article you should have a better understanding of fundamental analysis and how to use it as part of your FOREX strategy.

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.

Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Just like most markets the FOREX market is controlled by supply and demand. Many economic factors can affect the supply and demand but the two most critical ones are interest rates and the strength of the economy. The over all strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.

There are many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all traders.

There are many indicators that are released but some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

Interest Rates – can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade – If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.

In the US alone there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the internet and is provided by many brokers.

Forex Fundamental Analysis. Basics

What is fundamental analysis?

Fundamental analysis in Forex is a
type of market analysis which involves studying of the economic situation
of countries to trade currencies more effectively.

It gives information on how the big political and economical events
influence currency market. Figures and statements given in speeches by
important politicians and economists are known among the traders as
economical announcements that have great impact on currency market moves.
In particular, announcements related to United States economy and politics
are the primary to keep an eye on.

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What is economic calendar?

Economic calendar is created by
economists where they predict different economics figures and values
according to previous months. It contains next data:
Date — Time —
Currency — Data Released — Actual — Forecast — Previous

For example: If the forecast is better than the previous figure,
then US dollar usually is going to strengthen against other currencies.

But when news are due, traders have to check the actual data.

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If to look at oil prices, a rising price will result in weakening of
currencies for countries which depend on huge oil import, e.g. America,
Japan.

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Whose speeches to keep an eye on?

Chairman of the Federal Reserve
Bank of USA, Secretary of the Treasury, President of the Federal Reserve
Bank of San Francisco and so on. Speeches of those prominent people are
watched closely by traders.

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What are the most powerful figures that move Forex
market?

Interest rate
Traditionally, if a country raises its
interest rates, its currency will strengthen because investors will shift
their assets to that country to gain higher returns.

Employment situation
Decreases in the payroll employment are
considered as signs of a weak economic activity that could eventually lead
to lower interest rates, which has negative impact on the currency.

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Trade balance, budget and treasury budget
A country that has
a significant Trade Balance deficit will generally have a weak currency as
there will be continuous commercial sellings of its currency.

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Gross Domestic Product (GDP)
GDP is reported quarterly and is
followed very closely as it is a primary indicator of the strength of
economic activity.
A high GDP figure is usually followed by
expectations of higher interest rates, which is mostly positive for the
currency.

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Think of fundamental analysis for a publicly traded stock then multiply many times to scale up to an entire country or a number of countries in some cases like the Euro.

Forex fundamental analysis is a market analysis that tries to determine the future price of a currency based on current market trends. The difference from technical analysis lies in the fact that fundamental analysis is not based on mathematical probability so much as it is a complete analysis of a currency based on political, economic and environmental factors. Fundamental analysis focus on statistics and key numbers that indicate changes in supply and demand. It requires the trader to have basic knowledge of the market forces – supply and demand and how these are affected by changes in the general economy and political landscape. It is an analysis of the intrinsic value of a currency. How a certain economic or political event will affect the forex market is what fundamental analysis is all about.

The basics of trading on fundamental analysis consists mainly on analyzing these political and economic changes as they will have an effect on prices. This implies that traders will gather as much useful information as possible from news sources to gather info on unemployment, economic policy, political developments, inflation, growth rates and much more. Traders are constantly keeping an ear to the ground on speeches from policy makers and key commentators. Speeches and press releases from key figures in the Federal Reserve, Treasury and others are highly and almost hysterically anticipated as the market waits for these powerful policy makers to release news.

As always if there is an decrease in the supply of a good, in this case a currency, but the demand for that good remains the same, then the end result will be an increase in price. Likewise, if the supply increases while the demand stays the same, then the result is falling prices. So fundamental analysis is basically an analysis of a nations demand and supply for their currency. Many factors affect this balance which is why a trader going on fundamental analysis must know about many indicators such as Gross Domestic Product(GDP), Production (Industrial), Political Stability and Development, Interest Rates, Government Policies, International Trade, CPI, PPI, PMI and much much more.

Once all this data has been gathered, the trader will make an analysis of the currencies value against another. Then it can be decided if the currency will rise or fall against others. This process is fundamental analysis.

Speculation, hedging and arbitrage are the three key factors that dominate and influence Forex trading. While every trader may have one of these reasons to play with currencies, the technical analysis helps to forecast the price movements of these currencies. Many technical analysis tools are used to arrive at judgmental trading decisions. Forex market is a round the clock market and therefore the analysis should capture the very minute price movements.

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The historical data serves as a strong base for such analysis. The oldest technical analysis tool, known as “candlestickâ€‌, is believed to hail from Japan since the 18th Century. Then came the very popular “Dow Theoryâ€‌ in the 19th century, laid down by the very famous Dow Jones.

Any technical analysis would be based upon three assumptions viz.,

• A price trend always has a reason
• Historical trends may repeat
• All considerations in the analysis are based on the current market trend.

A good technical analysis is based on different trend patterns designed by the technical analysts. A best technical analyst would always advice to go along with the current trend, that is a trader should “Go Long or Holdâ€‌ in an upside trend and “Go Short or Sellâ€‌ in a downside trend. Technical analysis is all about charting out different patterns so as to enable the trader to decide on the best pattern and follow the same in his trading decision. The popular technical analysis tools are charts, trend patterns and technical indicators.

Technical analysts use the historical trends and market analysis to correlate it with the current factors affecting the market. This helps to understand the price direction in the future. Hence technical analysis involves much of mathematical calculations and statistical analysis. A number of technical analysis indicators have been widely used, again as per the perceptions and beliefs of the traders. Political, social, psychological and economic events largely affect the technical analysis. A good reason why technical analysis has gained much significance than any other analysis is its ability to gauge the very smallest movements in the market trends.

Technical analysis indicators are many and are based on different ways of analysis. They are based on moving averages, volumes, volatility and range. Moving average based indicators include three types – Moving Average, Moving Average Envelope and Moving Average Convergence Divergence. The volume-based indicators are again classified into Volume, On Balance Volume, Chaikin Money Flow indicator and Accumulation/Distribution. The famous “Bollinger Bandsâ€‌ & “Fibonacci Retracementâ€‌ are based on volatility analysis. Relative Strength Index and Stochastic method are based on range.

Why Technical Analysis?
While we have explained in brief about technical analysis, you would be keen to know why technical analysis serves as a popular tool in Forex trading. Large hedge funds, financial institutions, banks, corporates dominate Forex market. While they have the state-of-the-art technology to keep an eye on the market movements, they still adapt technical analysis to ensure that all political, social, psychological and economic factors are considered while analyzing the future price movements. Technical analysis is the best tool to identify right trends with correct prices.

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Fibonacci is the basis of many trading methodologies, and many billions of dollars are traded every year based on Fibonacci techniques alone.
There is a deep-rooted history associated with the basic principles of Fibonacci - named for the mathematician Leonardo Pisan Fibonacci – but we will instead focus on a series introductory articles about how you can use his series of numbers for analyzing the markets.

Let’s do cover a bit of ground before we can get to the charts. Fibonacci is best remembered for his Fibonacci sequence, which is the series of numbers where each number is the sum of the two preceding numbers. 1, 1, 2, 3, 5, 8, 13, 21, 34, 55…

As traders, we are most interested in the ratio between these numbers – called the Fibonacci ratios. By comparing the relationship between each number, and each alternate number, and even each number to the one four places to the right, we derive some fairly consistent ratios.

The most important rations for trading are: .236, .50,.382, .618, .764, 1.382, 1.618, 2.618, 4.236, and for good measure we include 1.00…. This can start to look complicated, but it really isn’t. It turns out that the ratios are mathematical principles prevalent in nature all around us. What’s more is that these rations are even prevalent in man-made objects.

There are many interesting, entertaining, and poetic observations about Fibonacci numbers and ratios in the universe. Fibonacci numbers and ratios appear in ancient buildings, in plants, planets, molecules, the dimensions of human bodies, and of course rabbit populations. But of what use is all that to the intrepid trader? Traders usually study charts! Fibonacci ratios may be applied to the price scales and also to the time scales of charts. Many traders and analysts will apply Fibonacci analysis to the price scale.

Since prices never move in a straight line, you will easily see the ebb and flow of a currency on chart. More importantly, you can see how currency prices advance and retrace, and this is the key to using Fibonacci. All currencies that are liquid will often retrace and advance in Fibonacci proportions, but not always.

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