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An Easy Introduction to Fundamental Analysis For The Apprentice Forex Trader

It is commonly said that the secret to successful Forex trading is information but, though correct and timely information is indeed essential for foreign currency trading, it is the examination of this information that is the real secret. There are two main types of analysis used in currency trading � technical and fundamental analysis - and in this short article we look at exactly what is meant by fundamental analysis.

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

Basically, fundamental analysis gives an outline of currency movements and a broad picture of economic conditions that might well affect the value of a particular currency. With this picture in mind, Forex traders will then normally go on to make use of technical analysis to then plot entry and exit points into the market and to extend the information gained through fundamental analysis.

The foreign exchange market is very much like other markets and is governed to a large degree by the forces of supply and demand, which are themselves affected by economic conditions. Two economic factors that affect supply and demand are the strength of the economy and interest rates and the strength of the economy is itself affected by foreign investment, the gross domestic product (GDP) and the economy's trade balance.

A variety of economic indicators are released by governments and by other sources and are normally held to be sound measures of the health of an economy that are followed by all sections of the investment market. The majority of economic indicators are released once a month although a few are released more often and usually weekly.

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

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

International trade indicators are also especially important for the foreign exchange trader. A deficit on balance of trade, indicating that exports levels are below those for imports, is usually seen to be an adverse indicator as money leaving the country to buy goods from overseas might well have the affect of devaluing the currency. However, fundamental analysis will also provide an indication of the expectations of the market and these will normally dictate whether or not a trade deficit is unfavorable. It could be the case, for instance, that a county normall operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general, trade deficits will only affect currency prices where they are above the level that the market would normally expect to see.

Every country will have its own set of economic indicators (currently there are some 28 major indicators being used in the US) and these strongly influence the financial markets. For this reason, Forex traders need to be conversant with them and examine them with care when preparing their trading strategies.

Luckily, for those traders working on the Internet, many websites now provide an abundance of up-to-date information, but it is the responsibility of individual foreign currency traders to extract this information and then apply the principles of fundamental analysis to it to make their trading decisions.

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