Fundamental analysis.
There are two types of market analysis in Forex: technical and fundamental. While the former has been covered in numerous books and articles, the latter is usually much less well-covered.
Fundamental analysis is the analysis of external factors that may influence exchange rate movements. These factors typically include changes in the economic, social, and financial systems of the country issuing the currency in question, as well as external factors that may increase or decrease demand for the currency.
Fundamental analysis, unlike technical analysis, seems more understandable to a novice trader, as its research touches on areas familiar even to the average person. For example, everyone understands that news of a crisis in European countries will cause the euro to fall.
But in practice, things are much more complex, and not all events can significantly influence an existing trend, and only a truly significant news item can trigger a reversal. Therefore, if you decide to engage in trading based on fundamental analysis, you must clearly understand what is guaranteed to influence the exchange rate.
Fundamental analysis factors in Forex.
1. Economic events – these include reports of improved economic indicators such as GDP, trade balance, and general economic performance.
2. Social changes – unemployment or employment levels, inflation, major strikes, and civil unrest.
3. Financial – reductions or increases in national bank interest rates, stability of the banking system, and the introduction of new regulatory measures, such as requiring exporters to sell all their foreign currency earnings on the interbank market.
Sources of information.
To conduct a deep fundamental analysis and make a long-term forecast, news releases alone are not enough. It is necessary to analyze the dynamics of changes in various factors and link them together.
For example, the Bank of Japan raised the key interest rate, which led to a short-term strengthening of the Japanese yen. However, a significant increase in the cost of borrowing later slowed economic growth. This, in turn, again triggered a downward trend in the Japanese yen.
It should be noted that such long-term forecasts are rarely used in forex trading. Long-term trades require significant financial resources and do not always justify the investment. Therefore, it is common practice to trade using short-term forecasts, for which regular news serves as the main source of information.
These are divided into scheduled and spontaneous; you can always check the release schedule of planned events in the economic calendar . As for current news, it can be found on any news site with a financial section or on the websites of most dealing centers.
Trading using Fundamental analysis.
The news trading system is quite simple, although, according to some traders, it isn't particularly effective. The problem is that the exchange rate doesn't always react adequately to the news, and the trader ends up making losing trades.
But in general, news trading works like this: you monitor news releases, analyze their impact on a specific currency, and determine its position in the currency pair.
If the news is positive, it will trigger an uptrend if the currency is the base currency. Conversely, if the news is negative, the price of the base currency will fall. The opposite trend applies to quoted currencies.
This strategy is described in detail in the article " Trading Forex News ."
If you need additional information on this topic, it can be found in the section of our website with the same name, " Fundamental Analysis ."
