Fundamental analysis in Forex
Market analysis is one of the main trading tools that helps a trader to make the right decisions. In Forex, two types of analysis are used — technical and fundamental. Due to technical analysis of the market, a trader determines the price movement direction by charting on the trading terminal. This method is used by traders for short-term operations and is based on the analysis of prices. Identification and evaluation of the trends in currency exchange rates in the long term are made by the fundamental analysis tools.
Forex fundamental analysis is an assessment of economic and political events in one or several countries. It is made to understand the changes in the national currency rate in the long term. The main criteria of fundamental analysis are economic development and the national banks' interest rate. Depending on these parameters and the potential level of supply and demand, the course direction is determined.
Fundamental indicators measure the economic condition of any country and are regularly published in the media. The main economic indicators in the fundamental analysis are:
- volume of import-export operations;
- consumer price index;
- producer price index;
- performance indicators of production;
- indicators of productivity and unemployment;
- movement indicators of investment and commercial capital of the country;
- performance of the construction industry, etc.
The level of these indices reflects the economic stability of a certain state and allows a trader to understand if it is profitable to invest money in a particular currency. For example, when a country imports much more than it exports, it states about the national currency devaluation and becomes a negative sign for an investor. Increasing unemployment in a country causes the production decrease, which entails the national currency depreciation. A consumer price index is a precondition for increasing its rate.
The interest rate is another basic indicator used in fundamental analysis. Its growth may be a prerequisite for the inflow of foreign investments into a country's economy and for strengthening its national currency. The opposite situation is possible: an increase in interest rates may cause sale of the investor's shares of the companies in the domestic market. Sale of securities is a well-founded reaction of investors caused by a certain fear: the production efficiency may be reduced due to the difficulties with loans. This situation has a negative impact on the country’s economy and entails the national currency depreciation.
Therefore, to understand the changes in the main economic indicators properly, it is important for a trader to have statistics from the media as well as understand the principles of the national currency rate and the relationships between states and their economic programs. It is also important to monitor the political life of a state: a sudden revolution, changes in the course of political development or changes in the macroeconomic relations between two countries can significantly affect the value of the national currency in the future.
In Forex, fundamental analysis is used only by 20% of traders. This is due to the fact it is practically useless in the short scale. Besides, it is quite difficult because it requires to comprehensively assess many parameters with simultaneous determination of cause-effect relations. It is made to build the right conclusions. Therefore, all traders engaged in short-term trading in Forex often use technical analysis in their decision-making.