Considering everything, fundamental analysis is one of the most effective ways of analyzing the performance of an investment – no matter if its a forex account or a public traded company. With fundamental analysis, we can estimate how political or economic outcomes affect the performance of a specific sector of a market – like the currency market or the stock market. For reaching acceptable results, it is essential that you do your homework. That means keeping up to date with the news and other information that can affect the fundamental performance of your position, no matter if it is the economic or political realm. Some investors might find it useful to analyze newspapers, navigate through the web for breaking news, and even apply tools like economic calendar. Economic calendars are specially useful for predicting turbulence in a market. You’ll see that the highest movements are around important releases of economical information.
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.