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| Fundamental Analysis in Foreign Currency Trading |
By:
Martin Miller |
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In fundamental analysis, forex traders look at the "fundamentals" to estimate the effect on the currency price. There are many fundamentals to analyze, including these market movers:
* Economic conditions * Political environment, particularly with regard to stability * Interest rates * Supply and demand for the currency * Government policies * Historic performance of the currency * International trade position --- deficit or surplus * Consumer price index (CPI) * Gross domestic product (GDP) * Cost of producing goods (PPI)
Each country's central bank oversees the economy, and the fundamentals that affect it. The factors are announced by the central banks regularly, sometimes monthly but often weekly, and the exact time of these announcements is known in advance. Another term for these factors is "indicators", which you will hear often in forex trading.
It's important to understand that there is always a certain expectation of these indicators before they are announced, and currency traders are positioned in the forex market accordingly. Indicators that conform to these expectations will cause little effect on the market.
On the other hand, if these expectations are not what actually occur, currency prices will definitely move. This is the basis of forex fundamental analysis, and many traders rely on it exclusively. I personally, however, recommend a combination of fundamental and technical analysis.
The European Union's ECB, the U.S. FED, the U.K. BOE and the Japanese BOJ have the most influence of all the central banks. As the saying goes, when they speak, people listen --- and also trade!
As in many business environments, the forex is affected most by U.S. indicators. Although the ECB indicators have less impact, they can make a difference when they are different from what the market expected. Pay particular attention to what senior banking and financial officials have to say about the two main economic drivers, interest rates and inflation.
Forex fundamental analysis is made all the more complicated because accurate measurement of the variables and their relationships is difficult. Historical experience is the basis of estimates of the fundamentals. On the opposite side, assumptions are often made on the basis of what's happening in world news, such as wars, inflation, major political changes, etc. But these assumptions often don't come true, and the markets may lag behind a bit in making adjustments.
The forex market is, like life itself, subject to the law of supply and demand. If currency prices remain at the same level despite a decrease in demand, eventually the price will increase. The opposite also holds true: if demand stays the same while prices have increased, eventually the price will decrease.
In a nutshell, then, this is how forex fundamental analysis works.
Visit http://www.forexinfoplace.com to claim your free 7-part forex mini-course.
About the author:
Martin Miller teaches new forex traders the basics of foreign currency trading at http://www.forexinfoplace.com Visit today and claim your free 7-part forex mini-course. |
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