In order to successfully create a forex trading strategy all profitable traders will use some sort of either technical or fundamental analysis. Many traders choose to go with technical analysis as their main tool because it, all else being equal, is easier to implement than fundamental analysis. With the software available much of the hard work is done and you really don’t need to have a solid understanding of advanced math to use these strategies. Other traders choose instead to go with fundamental analysis. Fundamental analysis can seem a bit overwhelming at first because it involves so many factors.
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.