Trading in the Forex markets requires intimate knowledge in the fundamental analysis of market conditions and specific trading patterns before making a trade.
Fundamental Analysis is a systematic procedure that broadly follows the market trends and economic conditions of a country or an international region. In fundamental analysis, a trader studies first the primary economic indicators and movers at a given period before he/she goes short or long on a currency trade.
Difference between Technical and Fundamental Analysis
As said above, fundamental analysis basics deal with major factors affecting the economic state of the nation, and other significant forces such as social and political happenings, international relations, and even natural disasters. Simply speaking, fundamentalists study the general economic status of a nation and make informed currency trade decisions based on how well or how badly the economy is going.
Forex traders who rely on technical analysis examine the exact movements of major currencies as evidenced in historical charts. Currency rates fluctuate in value rapidly over a period of time, and this activity is rendered on graphs and charts that show trends and the likely movements of the currency.
Which approach is better?
Smart traders know that the best results come from a balanced approach using both methods. Success comes from keeping abreast of the nation’s financial standing, economic forecasts, and general news from different sectors of the society while looking closely at the precise movements and data trends in the price charts.
Experienced traders do not find it advisable to focus entirely on either approach since cues for trade entries exist in both methods of study. It is good to learn fundamental analysis basics as well as incorporating the basics of a technical study. Go here: http://www.babypips.com/school/kindergarten/three-types-of-analysis/fundamental-analysis.html
Main Drivers and Economic Indicators of the Forex Markets
Currencies, like any other economic entity, are influenced by a myriad of factors that affect their prices. The movements of currencies and their spot prices are like the visual elements that you see in front of the computer. The processes that occur inside the computer can only be scrutinized more deeply with tools and unique methods.
This scenario is the same with economic factors, which can range from subtle financial repercussions to explosive events such as terrorist attacks and massive corporate layoffs. In fundamental analysis, there are primary drivers that every trader should be aware of and analyze well.
- Interest Rates – This is one of the key drivers of currency prices. If the interest rates go up, the currency prices generally increase because high-interest rates attract more foreign investors.
- Oil – Of course, this is a no-brainer. We all know how oil and energy make the world go round.
- Gross Domestic Product – GDP is the broadest measure of a country’s growth. A trader has to have knowledge of how much the country has economically grown or shrunk through the sum figure of all the goods and services the country has produced.
- Retail Sales – Consumer spending patterns are deciphered here, and the figures gained from a country’s total retail sales are one of the key indicators of growth.
- Industrial Production – This measures a country’s capacity of its factories to produce goods and raw materials.
- Housing Starts – Traders should know the general figures of how many houses in the country have been constructed at the beginning of each month. It is important to know this since the housing sector is usually the first to be hit with the effects of interest rate changes.
It is worth noting the traders who are more attuned to the fundamentals that affect currencies are necessarily intelligent and updated. The Oracle of Omaha and one of the world’s top richest men, Warren Buffet, relies heavily on the basic fundamental analysis of the U.S. economy. To be a successful trader, one must pay attention to the key drivers of the currencies being traded.