Forex traders can trade through many technical trading tools; for instance, the Fibonacci retracement, candlesticks, trend lines and others. They can also trade in news relying on the impact of news on the forex trade. The third virtue which gives wings to trading is fundamentals. Along with technical analysis and news trading, fundamental analysis forms the broad base on which trading is being done. It does not matter whether you play the game through robots or strategies or personally, fundamental analysis is way too important.
Forex Fundamental Analysis deals with predicting the future price movement of an economic instrument. This means that a trader has to study the present and the past monetary graph of a country thoroughly. Only then can he make accurate predictions in Forex. It involves various figures and speeches made by the politicians. Even the words uttered by finance ministers about the economic direction of a country are important. In this regard, it is important to mention that fundamental analysis shall not be confused with news trading.
Forex fundamental analysis takes within its compass various governmental policies, social readjustments and economic upheavals. At a macro-level, it is the fiscal balance of a country, at a micro-level, it can be the balance of a single multinational, but truly fundamental analysis goes a long way in suggesting how a given currency might behave.
Forex fundamental analysis looks at trading in a currency pair keeping an eye on expected volatility of a stock or its extended stability owing to an instable or stable economic, social and political climate of the country. It helps completely with the trading bit only keeping the immediate price movement of a stock aside. That is probably more a part of news trading.
A forex fundamental analyst weighs options and recognizes any possible change in the value of a financial instrument. For instance, an increase in supply at constant demand decreases market prices. A fundamental analyst will use demand and supply curve of a financial instrument like currency, goods, services and determine its movement by gauging its historical data, management efficiency, logistics and government bias (forward or backward). In fact, for a long term prediction, a couple of indicators are enough but for a short term trade, all economic indicators come into play.
The idea is simple. While trading in a currency pair, profit can be ensured if an analyst correctly gauges whether a currency will rise against the other or fall in relation to it. It is here that proper estimation of intrinsic value through fundamental analysis becomes important. If you use all the above mentioned factors and analyze the intrinsic value accurately, you can find the base strength of the currency, the point at which it is stable. Then you can read the present-day currency exchange rate and determine whether the currency will rise or fall.
The business cycle and the inflation or deflation patterns help a lot with the fundamental analysis of a particular currency. These are termed as basic concepts.