What is a Forex fundamental analysis?
There are two major types of analysis that forex traders rely on; technical and fundamental analysis. Technical analysis involves the analysis of the forex price charts on trading platforms. It uses chart patterns, trading theories, and indicators to determine the most likely direction of price movement. This type of analysis uses past price data on forex trading platforms to predict price movement.
Fundamental analysis involves a holistic approach to understanding the factors influencing currency prices. These are often economic indicators, news, social and political happenings that affect the value of a currency and its supply and demand. Understanding macro and microeconomic nuances ensure that your trading and investment decisions are informed choices highly likely to turn out profitable.
In the last, traders and renowned investors solely paid attention to fundamental analysis to guide their investment decisions. It focuses on the overall state of the economy and researches various factors including the local and international policies, unemployment data, and the strength of a country’s economy.
How to Carry Out Forex Fundamental Analysis
At its core, fundamental analysis purports that the price of an asset or currency doesn’t reflect its intrinsic value. This means that a currency should be worth a lot more than it currently does sometime in the future based on current information, data, and happenings.
If you want to do a detailed fundamental analysis of a currency, follow these four steps;
Educate Yourself
To analyze and understand the economic calendar and day, you have to educate yourself. Sure, some platforms provide brief information upon news releases, but knowing these for yourself helps you think critically about them and make independent decisions. Traders who don’t understand the basics of economics, supply and demand, unemployment, exports, etc., have to depend on other people’s judgments before making deductions about the forex market.
You can educate yourself through lots of resources available online. From ebooks and video lessons to short courses, learning the basics of fundamental analysis is relatively easy and definitely achievable.
Review the Economic Calendar
The economic calendar is a list that contains the relevant news and economic reports for a specific trading day or period. These can be found on forex trading platforms, and they allow you to prepare adequately for the upcoming events. Check the economic calendar and note the high-impact news events as well as those that affect the specific currencies you trade. The high-impact news events have significant impacts on the forex market and are worth studying. These include interest rate decisions, unemployment data releases, consumer price indices, etc.
Obtain Relevant Data
Once you’ve noted the key fundamental news releases, begin to collect the data as it’s being released by the official bodies. Note these down and make sure you get the information from reliable sources.
Compare the Information Provided
The final step is the comparative analysis of all the information that you’ve gathered. This involves different styles of comparison to give you a wholesome view of the market condition. You can compare the same parameter across several currencies to see the differences between them and determine which ones would be stronger than the other.
For instance, countries with low interest rates like Japan have weaker currencies. This is because a low interest rate can encourage borrowing and increase the competitiveness of Japanese exports. However, it can reduce the confidence of investors and weaken the currency against other countries with higher interest rates.
You can also analyze the trajectory of a single news event on the same currency at different times. Find out the previous values for a news report, compare that to the current one and use that to have the potential strength or weakness of the currency.
This comparison should also involve the extent of the political and economic stability of a country. Countries with a healthy political and economic outlook tend to have stronger currencies than those in disarray and perpetual instability.
4 Economic Indicators for People to Use in Forex Trading
Interest Rates
A country’s interest rate is often regarded as the most powerful determinant of the fate of its currency. Interest rates are set by Central banks, and they affect a variety of economic parameters. Countries with high interest rates are likely to have an influx of investors who buy that currency. High interest rates, however, tend to discourage spending and borrowing by private banks and citizens.
Low interest rates stimulate borrowing by both private banks and individuals, as well as encourage consumption and production while improving the economy in general.
Inflation
Inflation refers to the rate of increase in the price of goods and services with a reduction in the value of money. It can occur due to an increase in the cost of production but a demand for products and services can cause inflation if the buyers are willing to pay more money for them. Of course, there is a level of inflation that is acceptable and deemed healthy for an economy to thrive. Understanding the level of inflation in various countries helps you ascertain the demand and supply of a currency as well as its value.
Gross Domestic Product
The GDP is considered a strong indicator of the strength of an economy because it considers the market value of all goods and services produced in a country or state within a time period. While examining GDP data, you should prioritize the rate of change of the GDP over the actual value obtained. The percentage change in the GDP over time shows the economic trajectory of a country as well as the fate of its currency.
Retail Sales
The retail sales data measures the sales of all retail stores or the sales of goods and services to consumers and end-users.
This is important because consumer spending drives the economy as it fosters the exchange of money for goods and services while keeping the economy healthy.
Tips to Remember When Learning About Forex Fundamental Analysis
If you want to take advantage of forex fundamental analysis effectively, here are 3 tips to help you get started.
Monitor the economic calendar
The economic calendar should be reachable at all times because it’s an invaluable tool for fundamental analysis. The calendar also provides details about past reports and how the market reacted to them. The helps you compare the past and present data effectively.
Study the most relevant economic indicators
The forex market is quite flexible and reacts to news to different degrees at different times. Some news releases may be quarterly or monthly reports that have medium impacts on the forex market. When a yearly report of the same news event is released, it could have a high impact on the currency prices and exchange rates. The relevance of a news report could also vary based on the political and economic realities of the country at that time.
Don’t chase the news
Many traders have emotional reactions to news events. When these reports are released, don’t chase the market movement. Instead, try to get the full picture and understand how sophisticated and learned investors are likely to react. For instance, the fact that a report comes out with favorable data doesn’t mean that the currency concerned would appreciate against another, especially if the other has a better report.
If you must trade the news, pause and follow your trading plan to the letter.
Know more about Forex fundamental analysis through Decode Global
Now that you understand how fundamental analysis works, you can learn more about the various news data and their relevance by opening a forex trading account on a regulated and reputable forex broker. This ensures that you practice your fundamental analysis skills while executing and managing your forex trades accordingly.