A Simple Introduction to Fundamental Analysis Written For The Apprentice Forex Trader

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It is usually said that information is the basis of profitable Forex trading but, while accurate and timely information is indeed crucial for currency trading, it is the analysis of this information that is the true key. There are currently two main types of analysis used in currency trading � technical and fundamental analysis - and in this short article we look at just what is meant by fundamental analysis.

In its simplest form, fundamental analysis scrutinizes economic and political conditions that might have an affect upon currency prices and Forex traders who use fundamental analysis rely upon news reports for information about a range of things including inflation, economic policy, growth rates and employment rates.

Basically, fundamental analysis gives an overview of currency movements together with a broad view of economic conditions that may well affect the value of a specific currency. With this view in mind, foreign currency traders will then often go on to use technical analysis to plot entry and exit points in the market and to add to the information gained through fundamental analysis.

The foreign exchange market is much like any other market and is governed to a large degree by the laws 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 affected by the gross domestic product (GDP), foreign investment and the economy's balance of trade.

Many different economic indicators are released by governments and other sources and are usually considered to be reliable measures of the health of an economy that are followed by all sections of the investment market. The majority of economic indicators are released monthly although some are released more often and normally weekly.

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

Interest rates are a particularly important indictor as they can have a weakening or strengthening affect on a particular currency. For instance, high interest rates could attract foreign investment and strengthen the local currency, while stock market investors normally react to rising interest rates by selling because of a belief that higher borrowing costs will have an unfavorable affect on many companies. Large-scale selling by stock market investors can often lead to a downturn in the stock market and the economy.

International trade indicators are also especially important to the foreign exchange trader. A deficit on balance of trade, with export levels below import levels, is normally seen to be an unfavorable indicator as money leaving the country to buy foreign goods could well have the affect of devaluing the currency. However, fundamental analysis will also give an indication of market expectations and these will generally determine whether or not a trade deficit is unfavorable. For instance, it may be the case that a particular county frequently operates with a trade deficit and that this fact has already been factored into the price of its currency. In general terms, a trade deficit will only affect currency prices where they are higher than the market would ordinarily expect to see.

Each country has its own particular set of economic indicators (currently there are in the region of 28 major indicators used in the US) and these have a strong influence on financial markets. For this reason, Forex traders have to be aware of them and examine them with great care when preparing their trading strategies.

Luckily, for those traders working online, many sites today provide a wealth of the latest information, but it is the responsibility of individual foreign currency traders to take this information and apply fundamental analysis to it before they make their trading decisions.

Article Source: http://depositarticles.com/

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