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

Fundamental analysis is one of the basic tools at the disposal of the Forex trader and is a tool that has to be well understood.

It is often held that the secret to profitable Forex trading is information but, despite the fact that correct and up-to-date information is indeed crucial for currency trading, it is the examination of this information which is the true secret. There are two main types of analysis which are used in foreign currency trading � fundamental analysis and technical analysis - and in this short article we look at exactly what is meant by fundamental analysis.

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

Basically, fundamental analysis provides an outline of currency movements together with a broad picture of economic conditions that might well affect the value of a particular currency. With this picture in mind, foreign currency traders will then generally move on to use technical analysis to plot entry and exit points in the market and to supplement the information gained using fundamental analysis.

The foreign currency market is much like any other market and is governed to a large degree by the laws of supply and demand, which are themselves affected by economic conditions. Two of the most important economic factors affecting supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by foreign investment, the gross domestic product (GDP) and the economy's balance of trade.

A whole variety of economic indicators are released by governments and by other sources and are usually held to be reliable measures of economic health which are followed by all sections of the investment market. Almost all economic indicators are released once a month although some are issued more often and normally weekly.

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

Interest rates are a very important indictor because they can have a weakening or strengthening affect on a currency. High interest rates may, for instance, attract foreign investment which strengthens the local currency, while stock market investors usually react to rises in interest rates by selling because of a belief that higher borrowing costs will have an adverse affect on many companies. Large-scale selling by stock investors can often cause a downturn in the stock market and the national economy.

Indicators of international trade are also extremely important to the foreign currency trader. A deficit on balance of trade, indicating that imports have exceeded exports, is normally seen to be an adverse indicator as money flowing out of the country to buy foreign goods may well have a devaluing affect on the currency. However, fundamental analysis will also indicate market expectations and these will normally determine whether or not a trade deficit is unfavorable. It may be the case, for instance, that a county normall operates on a trade deficit and that this has already been factored into the price of its currency. In general terms, trade deficits will only affect currency prices where they are above the level which the market would usually expect to see.

Each country has its own set of economic indicators (presently there are in the region of 28 major indicators used in the US) and these strongly influence the financial markets. As a consequence, Forex traders must be aware of them and study them with great care when they are preparing their trading strategies.

Fortunately, for those traders working online, many sites now carry an abundance of the latest information, but it is the responsibility of individual foreign currency traders to take this information and apply fundamental analysis to it in order to formulate their trading decisions.

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