An Introduction to Fundamental Analysis Aimed At Newcomers To The World Of Forex Trading

It is generally said that information is the key to successful Forex trading but, despite the fact that accurate and timely information is indeed vital for currency trading, it is the examination of this information which is the true key. There are two main types of analysis which are used in Forex trading fundamental and technical analysis - and here we are going to look at just what is meant by fundamental analysis.

In its simplest form, fundamental analysis looks at both economic and political conditions which might affect currency prices and Forex traders who make use of fundamental analysis rely upon news reports for information about a range of things including, economic policy, growth rates, inflation and employment rates.

In essence, fundamental analysis provides 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 frequently move on to make use of technical analysis to then plot entry and exit points in the market and to extend the information gained through fundamental analysis.

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

Many different economic indicators are released by governments and other sources and are generally considered to be sound measures of the health of an economy which are followed by all sections of the investment market. Almost all economic indicators are released monthly but a few are published more often and usually weekly.

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

Interest rates are a very important indictor as they can have either a strengthening or weakening affect on a particular currency. For example, high interest rates could attract foreign investment which strengthens the local currency, while stock market investors usually react to increases in interest rates by selling in the belief that higher borrowing costs will have a bad affect on many companies. Large-scale selling by stock investors can frequently lead to a downturn in both the stock market and the economy.

International trade indicators are also particularly important to the Forex trader. A trade deficit, showing that imports have exceeded exports, is usually seen as an adverse indicator as money leaving the country to purchase goods from overseas could well have the affect of devaluing the currency. However, fundamental analysis will also indicate market expectations and these will generally determine whether or not a trade deficit is unfavorable. It might be the case, for example, that a particular county frequently operates on a trade deficit and that this fact has already been factored into the price of its currency. Generally, a trade deficit will only affect currency prices in cases where they are above the level which the market would usually expect.

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

Luckily, for those traders working on the Internet, many websites today carry a wealth of up-to-date information, but it is up to individual foreign currency traders to extract this information and then apply the principles of fundamental analysis to it before making their trading decisions.

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