How do FOREX traders develop a strategy? Analysis, no matter if it is Technical of Fundamental Analysis needs information of quality. Let’s take a look at Fundamental Analysis for FOREX trading. In this case, we will be analyzing the economic or political conditions that affect our assets. In this case, our currency account. Many factors can have a positive or negative effect on currency prices. However, the facts that can affect a FOREX position are not infinite. The most important are economic policies, GDP, inflation, growth rate. All this factors go into reports and good traders use these reports properly to give their trading an edge above other traders.

How do FOREX traders apply the Fundamental Analysis? The fundamental analysis is like a road map for their entry and exit points into the FOREX market. If they have a broad overview of the market conditions they will entry the market in an appropriate moment. The laws of supply and demand have an effect on all prices, including currency. And they are influenced by the economic situation around them. The most important elements is how stable the economy is or what is its interest rate. Normally the interest rate, is the most important single indicator about what direction the FOREX will take. Higher interest means more people buying a currency.

A simple picture or the situation in a market is possible, analyzing carefully the indicators released in a country. Two very important are the international trade and, as said above, the interest rates. In international trade, a deficit balance is an unfavorable indicator. This simply means that there are less exports than imports. It means that there is a higher flow of currency going out the country than coming into the country. This has a negative effect on the price of the currency. Of course, there are exceptions. This is only a pressure to the price of currency, not a natural law. Many countries operate on deficit balances with a stable currency. Some countries have more resources than other to keep its currency stable.

How does the interest rate affect currencies’ price? The interest rate itself operates in a rather simple way. The only problem to analyze the instability on the currency price, is that many other factors are involved. High rates bring in foreign investment to a country but they also means a selling-off of stock market assets. A potential strengthening of the currency can be offset by the stock market going down. How can one arrive at any conclusion about when and where to invest, then? Good traders are able, since they use not only the concrete information, but also their nose, news and past experience to predict trends.

Imagine that investors receive two news from Japan:

1st - GDP is expected to grow during the current fiscal year.

2nd - the national Japanese army invested 100 billion JPY (Japanese Yen) in new weapons.
We know that both economic and political news can influence positively the demand for Japanese currency. Higher than expected, GDP growth also means that the economy has produced more goods or services. This leads to an increase in national inventories or an increase in foreign demand for goods. Japanese currency will soar in consequence of this higher demand. Foreign consumers and companies need more JPY in their pockets to buy those Japanese goods and services that provoked the GDP growth.

While these economic news imply simple ramifications, the same is the case with political information. The news about increased investment in Japan military pushes demand for JPY. The news affects the currency price in two basic ways. The first effect is of increasing demand for weapons and other military material. The total capital investment is higher, therefore it increases demand. The increase in demand implies more traders buying JPY to facilitate the higher number of forex transactions.

There is another way these news affect the currency exchange. This one is a more subtle process. The increase in defense investment implies that Japan is a country able to invest huge amounts of money in its security. Political stability means that most investors (domestic or international) will invest in its economy due to the feeling that their investments are more secure than equivalent investments in a less stable country.

Returning to the forex investor that we dealt with at the first place, the fundamental analysis hints that the Japanese Yen will be traded higher than the other currencies, like the Euro or U.S. Dollar. This trend, if perceived right, will allow the forex investor to exchange his USD account for a JPY account. Economic or political news sometimes have the reverse effect. Imagine that after some time into the investment, the forex investor knows that: 1st the inflation rate is recorded at a much higher than common level for the current fiscal year or 2nd political riots in Tokyo are increasingly more violent due to radical government legislation. In these cases, traders should expect the JPY to fall.
It is relatively simple to recognize negative news that negatively impact the Japanese yen. The forex trader can undoubtedly get his investment out of JPY balance and back into his USD balance.

In this example, we analyzed the macroeconomic or political aspects since we were analyzing forex trading. However, fundamental analysis can involve the study of economic and financial information, balance sheets or any other kind of news like tragedies, tsunamis or earthquakes. In a fundamental analysis you should simply consider everything that can affect the performance of a company. Imagine an investor interested in a publicly traded company, that gets constant news exposure. Fundamental analysis needs to study all data starting with company profit flows and company management ratings, not only its balance sheets.

Specifically some currencies are strongly linked to other factors, such as for example commodities. In this article we will show some examples on how you can trade currency based on movements in the commodity market and how you analyze those numbers.

Lets go back to the year 2005, where oil and gold unlike now where at all time record highs. Those two commodities were the big movers in the markets that year. The dollar had very different reactions to other currencies based on those commodity movements and how the foreign currency related to oil and gold. The way a trader can take advantage of this is to figure out how a currency will react when the oil price rices or falls. In the next example we will look at the CAD (Canadian Dollar) and its reaction to the oil price.

In 2005 the Canadian Dollar was very strong. This was a direct result of the high oil prices, rising more than 60% over the year. Because Canada is a net exporter of oil, the extra revenue of oil income greatly improved the CAD as the overall Canadian economy benefited.

On the other hand the other example here is Japan.
Japan is a an oil importing country, importing close to 99% of its oil, virtually all. Because Japan also lacks other natural resources to compensate for this energy problem, the Japanese economy is particularly vulnerable to the oil price. In fact the Japanese imports more than 79% of its total energy need. So stable and low oil prices are of utmost importance for the Japanese economy. So when the oil prices rise it hurts the Japanese Yen.

When we know these two things, how can we capitalize on this knowledge?

We can now accept these to currencies or rather their currency pair CAD/JPY as a prime indicator on oil prices. So, we can trade this currency pair for profits on nothing else but oil information. Or the CAD/JPY can give us additional information on the market sentiment on oil.

Gold is another currency that tends to be linked to especially the dollar. When the dollar weakens, and thus the markets belief in the monetary system, gold rises in value. While gold is no longer the reserve value of the world, it is still a leading storage of value and will likely continue to be so.

The most important indicators you need to pay attention to are:

Money Supply (M3)

This key figure measures the total of the European money supply, including notes, coins and all deposits in banks and electronic values. M3 is seen as the number one measurement for inflation within the union. The growth rate is examined every three months by using a moving average to avoid distortions in the data. The European Central Bank (ECB) is know to be very flexible so there is always room for interpretation on the data.

Preliminary GDP

This figure comes from the Eurostat and is a preliminary GDP measurement. When enough data is collected from enough member states, the report is released. Italy has never been and is not currently a part of the Preliminary GDP. It is easy to calculate the yearly values for both EU-27 and EMU-11 since they are the sum of national GDP’s.

Individual Member State Budget Deficit

Member states have signed to strive to not exceed a certain budget deficit level. The participants of the forex market follow their ability to stay within limits closely.

Harmonized Index Of Consumer Prices (HCIP)

Another inflation index. The European Union requires by law that price comparisons are made by Eurostat.

These are some of the common indicators for the Euro zone as a whole. Germany is the largest economy among Euro countries, and their economy has a huge impact on the Euro.

Let’s take a look then at some Key German Indicators.

Unemployment:

The Department of Labor issues a monthly report on changes in unemployment numbers. The data is seasonally adjusted as to correct for season specific work.

The other measure of unemployment is released by the Bundesbank, where there is always an approximation made public the day before the actual release.

Industrial Production

This index includes data on many different groups of products: Basic Goods, Producer Goods, Consumer Durables, Capital Goods, Energy and Mining.

IFO Survey

Germany is the largest economy in Europe and is therefore used as a measurement on which the overall state on the European economy is predicted. The IFO institute make surveys of 7,000 German companies which are asked to evaluate their short term businesses schedule and how they perceive the economy at the present. The impact of this data is increased when compared to historic data.

All countries have a number of key economic and political indicators that have high impact on the market when released such as the Treasury International Capital (TIC) in the USA and the ZEW Survey for the Euro zone countries. To be a successful fundamental forex trader basing your trades on these news, means you must know what they mean and how they impact the market. It is not merely enough to understand the written value of key figures, rather you must know how to put that information into context. It is important to look at economic news compared to how the general expectations and consensus are on that information. Remember you are not trading on your assessment, but against all other traders and how they view the same information as you do.

In this article we will look at some of the high impact economic indicators for USD currency pairs.

The USD is still the worlds dominating currency even amid economic turmoil. Commodities of all sorts are quoted in USD especially the worlds most important such as Oil and Copper. When someone makes a trade anywhere in the world for such a commodity they are quoted a price in dollars even if the trade takes place far from the US exchanges.

Let’s take a look at some important US indicators and when they are released:

Trade Balance:
This is a high impact indicator that measures the difference between the monetary value of all exports and imports in the US. If the Trade Balance is negative or falling that means there is more dollars going out than coming in, thus increasing supply and lowering price. If the Trade Balance is positive or rising the opposite is true, there is a demand for USD thus raising price.

The Trade Balance Report is released monthly around the 10′th of each month.

Treasury International Capital (TIC)
This key figure measures the monthly difference in cross border transactions in securities (long term). If this figure is positive or rising that implies there is a demand for USD to purchase American securities. In turn this means that a positive trend has positive impact on the USD.

The TIC is released monthly around the 15′th.

Gross Domestic Product (GDP)
The classic measurement of economic growth calculates the value of all services and goods produced in a country trough labor and property. A positive trend implies a strong economy which is good for a nations currency.

GDP figures are released quarterly.

ISM Manufacturing Index
This index measures the business activity in the manufacturing segment of the economy and the survey is conducted monthly. Any number over 50 is indicative of growth and vice versa. A positive growth trend is positive for the USD.

ISM is released the first working day of each month.

Philadelphia Fed Index
This is a monthly survey of Philadelphia Federal Reserve District Manufacturers business conditions. A positive trend is a sign of a strong economy and good for the USD.

PFI is released around the 15′th of every month.

Durable Goods Orders
A measurement of the value of current orders for durable goods (Expected life of more than 3 years). One of the indicators of capital investment. Traders watch this one carefully because it predicts future production very well.

Released around the 25′th of each month.

Consumer Price Index (CPI)
Inflation rate development measured from the consumer level. CPI is the major measurement of inflation. Historically, if the inflation rate exceeds 2% pr. Year, the Fed will increase interest rates, which will in turn attract foreign demand for treasury notes and USD.

Released around the 13′th of each month.

Producer Price Index (PPI)
Another index measuring inflation but this time from the producers viewpoint. Since producers usually pass on any production costs to consumer, this one can be seen as consumer inflation as well.

Released in the middle of each month.

Unemployment Rate
As the name suggests, the percentage of Americans currently without a job but still active in the job market. High unemployment is bad for the economy as consumers have less money to spend on goods which affects GDP negatively. Low unemployment means more spending and higher investments which affects both the economy and currency in a positive direction.

Released in the first week of each month.

Federal Open Market Committee (FMOC) Statement
The FMOC is the committee that decides short term interest rates in the US. They vote eight times annually on how to set the short term interest rate (Fed Funds Rate). A very important indicator that traders try to predict for the reason that interest rates are the major driving force behind currency prices.

Released every six weeks.

Federal Reserve Chairman Speech
One of the highly anticipated news of the economy as the Fed Chairman holds large influence over interest rates and therefore this speech gives an insight into the current agenda of the Feds monetary policy.

These are but some of the many economic indicators used in fundamental analysis. Knowing exactly when they take place is paramount for any trader. It is essential for any serious trader to have a forex calender with the dates and times of these events mapped in. There are many interactive calenders available online, with most being provided by the brokers.

As a nations currency is a reflection of that nations economic status there is a lot of information to digest and process in order to get the full picture. There are interest rates, GDP, Consumer Price Index, Retail Sales and many more. All of which are an area of study onto themselves and continue to prove difficult to predict even for economists in that particular field. Many traders therefore respond more to news and announcements from the major players in the economy. This is why you often see the market moving at its most violent, and profitable, around news sessions. In this article we will look at three major announcements that become forex fundamental indicators.

Federal Open Market Committee (FOMC) Meetings

The FMOC meetings take place eight times a year and are set up to evaluate the recent effects of monetary policy and then to make the necessary adjustments if needed. This is the single most important event in Forex trading when it comes to volatility of prices. The reasons for this is that interest rates increases and decreases have a great effect on the prices of currencies and economics around the world.

U.S. Non-Farm Payroll

This important economic announcement and indicator is released every first Friday of any given month. The U.S. Non-Farm Payroll reports on the number of workers employed in the nations industry and government and as such is a strong indicator of the robustness of the economy. Traders speculate a lot on future announcements as strong numbers here often will send the USD rallying.

Gross Domestic Product (GDP)

Gross Domestic Product is the base of all economic key figures. It is used to measure a countries production, hence the name GDP. This indicators calculates the sum and value added of all products and services in country. It is the single one method that economists use to analyze if the economy is growing or shrinking. Growth in GDP signals strength and opportunity to investors while a decline indicates recession and therefore loss of opportunity.

In conclusion of this article, let us end by saying that news trading in itself is not for everyone. While trading on economic news can be very lucrative it can also be very dangerous for the inexperienced trader. Most traders that lose their money do so because they traded exclusively on news without enough knowledge and experience.

Central Banks around the world are of course the major institutions in the market trough their huge influence by setting interest rates. Central Banks don’t act on feelings or sentiments though, their objective is to stabilize the growth of their nations through monetary policy. So if you can actually predict a countries economic growth there is a good chance you can predict the interest rate changes from the central banks. Let us take a look at why economic growth is important to predicting interest rates.

Economic Growth.

To predict he movements of a nations currency we already know that it is useful to have some idea of the movements in interest rates. So how does the growth or lack thereof of an economy influence interest rates? Central banks have two somewhat opposed goals: To stimulate the economic growth of an economy by making sure there is credit available for investment and to balance inflation levels as to not undermine the currency. These two goals are rarely achieved simultaneously, which is why it makes all the difference to predict where the central banks are focusing their efforts at any given time. Let us look at the first scenario: Stimulating growth to cut in interest rates.

If the economy is under performing compared to what ever benchmark the central banks are using, then they may consider slashing interest rates in order to stimulate investment by making more credit available to borrowers. This means that more of the nations currency is being made available to the market which means that according to the laws of supply and demand results in a drop in price. Of course there may not be that big of an impact at any interest rate cut, specially if the market had already anticipated the move to some extent.

On the other hand, if a nations economy is growing and doing well there is always the inherent risk of inflation particularly from pressure on wages due to low unemployment. When this happens, traditional economic theory tells us that there is a risk the inflation can curb further growth. In this scenario the central banks will want to combat this by limiting the availability of money, they raise interest rates to encourage savings. This means two things: A reduction in currency from domestic savings and a reduction in available currency from international investors who crave that currency to take advantage of higher interest rates. The result is a rise in the price of that currency.

Understanding the basics of economic growth goes a long way towards understanding forex fundamental analysis.

Surprise changes in interest rates is often what causes the biggest change in the market, which is why traders spend much of their time trying to predict what rates the central banks will set in the future. That is what we will look at in this article: How to predict changes in interest rates and what effect they have on the Forex market.

Interest rates are important to forex traders for the simple reason that the higher the interest rates of a nation, the higher the return on an investment in that currency and the higher the profit. Of course there is always a substantial risk with this strategy which is currency fluctuation. A profit made from interest rate payments could be offset by a reverse change in currency rates. So buying a currency with high interest payments by financing it with a currency with low interest rates is not as simple as that. If this was all it took to make arbitrage, there would be millionaires made every second! This isn’t the same as saying that interest rates are to confusing to  be properly understood and taken advantage of by the average trader, but it does imply that you spend time educating yourself on the basics of interest rates.

Interest rates are set by central banks all over the world by a board of directors that control the monetary policy of their country or for several countries in the case of the European Union. The basic strategy for the central banks are to raise rates to limit inflation and to lower them to encourage economic growth by lending. This dogma and the trade off between inflation and economic growth has long been considered a balance act where both are not possible to achieve at the same time.

To predict the actions of the central banks and thereby the movements in the forex market it is necessary to look from the viewpoint of the bankers themselves. The central banks will usually examine the most important economic indicators such as:

• CPI (Consumer Price Index)
• Consumer Spending
• Employment Levels
• Housing Market

With this data the the trader can make an informed decision as to the direction of the interest rates. If the economy is doing well and is growing rates will either stay the same or be raised. On the other hand if the economy is slumping and declining, the central banks may encourage borrowing to stimulate the economy by cutting interest rates.
Outside of doing this analysis yourself the forex trader can watch major economic announcements and listen to economic forecasts from major players in the field.

Think of fundamental analysis for a publicly traded stock then multiply many times to scale up to an entire country or a number of countries in some cases like the Euro.

Forex fundamental analysis is a market analysis that tries to determine the future price of a currency based on current market trends. The difference from technical analysis lies in the fact that fundamental analysis is not based on mathematical probability so much as it is a complete analysis of a currency based on political, economic and environmental factors. Fundamental analysis focus on statistics and key numbers that indicate changes in supply and demand. It requires the trader to have basic knowledge of the market forces – supply and demand and how these are affected by changes in the general economy and political landscape. It is an analysis of the intrinsic value of a currency. How a certain economic or political event will affect the forex market is what fundamental analysis is all about.

The basics of trading on fundamental analysis consists mainly on analyzing these political and economic changes as they will have an effect on prices. This implies that traders will gather as much useful information as possible from news sources to gather info on unemployment, economic policy, political developments, inflation, growth rates and much more. Traders are constantly keeping an ear to the ground on speeches from policy makers and key commentators. Speeches and press releases from key figures in the Federal Reserve, Treasury and others are highly and almost hysterically anticipated as the market waits for these powerful policy makers to release news.

As always if there is an decrease in the supply of a good, in this case a currency, but the demand for that good remains the same, then the end result will be an increase in price. Likewise, if the supply increases while the demand stays the same, then the result is falling prices. So fundamental analysis is basically an analysis of a nations demand and supply for their currency. Many factors affect this balance which is why a trader going on fundamental analysis must know about many indicators such as Gross Domestic Product(GDP), Production (Industrial), Political Stability and Development, Interest Rates, Government Policies, International Trade, CPI, PPI, PMI and much much more.

Once all this data has been gathered, the trader will make an analysis of the currencies value against another. Then it can be decided if the currency will rise or fall against others. This process is fundamental analysis.

In Islamic Forex Trading, there are no trades allowed that cannot be completed at the time of the trade. For example you cannot make a trade that will take six months to complete. You are only allowed to purchase foreign currency for the current trade value. If you make a profit you must be charged interest on it.

When trading for gold you must also trade with something of equal value. The same is true for trading silver or less precious metals.

Islamic Forex Trading accounts are set up to create a swap free account. This means that no swaps will be accounted to positions overnight. These accounts are set up for customers who believe that swaps are contrary to their religious beliefs.

The Islamic Forex Trading accounts do not receive or pay overnight interest or carry on positions in accordance with their religion. There are zero up-front commissions and no additional charges on these accounts.

In the Islamic Forex Trading account the interest payments on account balances is waived. Instead of swaps, the account will be charged a service charge on each lot left on the currency trade.

Forex traders have found a way for persons with Islamic beliefs to participate in the fast growing Forex market. The majority of Islam fundamentalists agree that Forex trading can comply with Sharia only if it is spot trading and doesn’t involve earning any overnight interest on the account.  As long as the trading doesn’t involve Riba (unlawful gain) it is considered to be legal in the Muslim world.

Forex is basically trading one currency for another. Some Islamic scholars tend towards the thought that since there is a lot of volatility and speculation, it should not be permissible under Islamic law. It is compared to day trading which is not allowed under any circumstance in the Islamic world.  You are not allowed to sell what you do not have in your possession. Therefore, you cannot purchase what you cannot take immediate possession of. This eliminates the speculative aspect of regular Forex trading.

You must take into account that some experts in Islamic law will interpret the laws differently and that you must be very careful to follow your beliefs very strictly to avoid being unlawful in your business ventures. Find a knowledgeable Islamic Forex Trading advisor to help you get started. They must be aware of all the rules on profits and loss. A great deal of experience would be helpful and you should check the credentials of the person you want to work with. When you are a little more experienced in the business end, you will be more comfortable with your Forex trading.