Fundamental Analysis in forex trading
Fundamental analysis is a comprehensive approach which requires a deep understanding of accounting, finance and economics. At the forex trading sector, this method is used mostly for evaluating and predicting the value of currencies. This can be done by analyzing various economic, social and political factors that can influence a currency’s supply and demand.
In general, fundamental analysis involves examining macroeconomic indicators, news and events and other information or data in order to assess an overall economic situation or a financial environment while trying at the same time to indicate and spot trading opportunities.
By understanding the underlying factors which drive price movements, traders can make more informed trading decisions in regards of buying or selling an asset when its price reaches to specific level(s).
Certain key elements for fundamental analysis in forex trading may include:
Geopolitical Events: Political stability, elections, geopolitical tensions or international conflicts and crisis can have significant impact on currency values. Traders can assess these events and their consequences on the forex market and take advantage by calculating price movements or gaps.
Central Bank Policies: Central banks play a crucial role in determining a country’s economic agenda. Interest rates, money supply and monetary policies are among the most important factors which affect how financial institutions react to any changes. Traders should monitor central banks announcements, speeches of important people (e.g. from economic ministry) and policy decisions in order to be one step ahead for future directions of a currency or a trading asset.
Market Sentiment: Market sentiment is the overall attitude and perception of market participants towards a particular currency pair or an asset. General market sentiment can be influenced by news, investor behavior and economic outlook.
Economic Indicators: Traders can analyze various economic indicators such as gross domestic product, inflation and interest rates, employment data, and consumers’ sentiment. These indicators can provide insights into a country’s economic performance and can influence dramatically the value of its currency. By checking a country’s economic health, traders can assess its currency strength.
Fundamental analysis is often used in combination with technical analysis, which involves analyzing historical price data and chart patterns. By integrating both approaches, traders should aim to make more accurate predictions for any future currency movements and identify trading opportunities in the forex market.
You can find a very helpful article which combines Fundamental and Technical Analysis here: Fundamental and Technical Analysis – Technical Indicators – Moving Average (MA)
