To become a successful forex trader, there are two types of analysis that you need to master. Technical analysis and Fundamental analysis.
Technical analysis is the analysis of price movements. You will analyze how the price of a currency pair moves over time. This will give you an idea of how you expect the price to move before you take a position.
Fundamental analysis is the analysis of what causes the price to move.
What Forex Traders Need To Know About Fundamental Analysis
What Is Fundamental Analysis?
Fundamental analysis is the analysis of economic, political, and social data surrounding a currency pair. This helps to provide the actual value of the currency or currency pair you are interested in.
For example, if the currency pair you want to invest in includes the Australian Dollar, fundamental analysis requires you to know the state of the economy in Australia.
It also needs you to investigate if there is any political instability or the likelihood of occurrence for the period you expect to hold the position.
Major economic announcements in countries with currencies you can trade affect the movement of the price of the currency. As a result, traders who rely on fundamental analysis to enter a trade need to keep their ears on news from the countries of the currency pair they are interested in.
When carrying out fundamental analysis for your forex trading, make sure to analyze all these factors.
What To Look At When Carrying Out Fundamental Analysis
The economy of The Country Of Interest
Forex traders who rely on fundamental analysis need to ensure that they investigate the underlying economic information of the currency pairs of interest.
For example, traders need to know the people in charge of the economy and their specialties or strengths. What kind of economic theories they support is important to know as this is what drives the value of the currency.
On the economy of a country, you need to know the prevailing interest rates on their assets. How the interest rates move affects the demand and supply of the currencies. This is why you need to keep an ear to the news.
If there is an announced change in the interest rates, there will be a change in the demand and supply of the currencies.
Surrounding the economy, research on whether the country has a large export market for its goods. This indicates strong demand for the currency.
Consider the current political state of the economy. For example, are there upcoming elections? Who is most likely to win in the elections? What is the economic mindset of the incoming president? What are the likely economic changes to happen?
You need to research all these factors to become a good fundamental analysis forex trader.
What is the social-economic situation in the country of the currency pair of interest? Research on inflation levels in the countries and whether the people have more jobs and lots of money to spend.
If this is the case, you can assume that there is a higher number of investors going to the respective countries, hence growing demand for the currencies.
This will cause increased demand for the currency or currency pair, hence influencing the price movement.
Benefits Of Using Fundamental Analysis In Forex Trading
Helps To Predict Demand And Supply For A Currency
Proper fundamental analysis will tell you the demand and supply of a particular currency or currency pair.
Where your analysis shows you that the demand is likely to rise, you can take a position that will see your profit with a price rise. Since rising demand causes the price to rise.
Helps To Determine Intrinsic Value Of A Currency
As a trader, fundamental analysis helps you identify currencies that are either undervalued or overvalued. You can then take a position that will help you earn a profit as the market corrects the value of the currency.
Helps To Make Your Technical Analysis Easier
Technical analysis is concerned with how price moves. Fundamental analysis checks why the price moves.
Proper fundamental analysis will make your technical analysis better and help you find the best points to enter a trade.
Fundamental analysis is an integral aspect of forex trading. It provides you with underlying reasons why prices move. Making you a better forex trader.