Fundamental analysis is forecasting future currency value by analyzing all of the economic, political, and social factors relevant to it. The goal of fundamental analysis in forex is to evaluate a currency’s intrinsic value, which can help determine whether a currency is currently over-or under-valued compared to another.
Fundamental analysis can help you create a profitable forex trading strategy by giving insight into how political and economic events affect supply and demand for currencies. For example, if traders believe that an economy has become too weak or is in danger of becoming so, they may sell that currency in favor of one they perceive as being stronger. The fundamental analysis measures the overall performance of an economy using economic indicators such as employment numbers, interest rates, gross domestic product (GDP), etc.
The most important aspect of fundamental analysis is understanding which economic indicators are most relevant to the currency pair you’re trading and their impact on it. While it’s impossible to predict with 100% certainty how a currency will react to certain events, understanding what they are likely to mean for that economy can increase your probability of making a successful trade.
How to Use Fundamental Analysis in Forex?
The first step to fundamental analysis is finding the correct information. Fundamental data you should focus on will differ depending on the currency pair you trade. Usually, it would help if you stuck with the data related to your major currencies. For example, if you trade USD/JPY and GBP/USD pairs, you need U.S. and U.K. economic data. Generally speaking, the most critical events are central banks’ interest rate decisions, inflation reports, GDP, and employment statistics.
- Central banks define monetary policy for a country and usually publish a statement after an interest rate decision meeting indicating their next steps or the general economic outlook.
- Inflation represents how much prices of goods increase over time, and the central bank of each country measures it through a consumer price index (CPI) report that comes out monthly.
- Employment data shows how many people have jobs and how those jobs have been created during the last month, quarter or year, depending on the country’s release schedule.
- GDP (gross domestic product) measures the value of all goods and services produced by an economy over a specific period, usually one quarter or one year.
Relying on the forex fundamental analysis strategy and economic calendars to determine the best investment time can help a trader make a profit, especially if you weigh their advantages and disadvantages.
Forex fundamental analysis uses data reports on economic, political, social, and other factors that affect the value of a country’s currency. This is an essential aspect of financial investment in forex, which is also associated with other strategies such as technical analysis, where you can use indicators such as SMA or RSI.
Many international organizations publish data on their websites that are available to all interested
parties. The information published by these institutions is the basis for any fundamental analysis.
What Are the Advantages of Fundamental Analysis?
Fundamental analysis is often a time-consuming process that requires a great deal of research. Traders using fundamental analysis will often spend a lot of time studying news releases from governments and companies worldwide. They may also follow analysts who cover specific countries or companies and track how these analysts view future performance. However, there are many advantages to using fundamental analysis in the foreign exchange market.
The primary advantage of fundamental analysis is that it can be used to identify long-term trends and market sentiment. While technical analysis focuses on short-term price fluctuations (price action), fundamental analysis can help you forecast potential price moves in the future. This type of analysis helps manage positions over an extended period.
Another advantage of fundamental analysis is that you can use it in conjunction with other strategies like technical analysis to build out a more robust trading plan. For example, you could use fundamental data to determine your long-term outlook for a currency pair and then use technical indicators to make informed short-term trades.
Fundamental Analysis – Key Points
Fundamental analysis is generally in most demand when it comes to long-term trading. This is because longer-term trends tend to be driven by the underlying economic and political factors rather than short-term technical indicators. Fundamental analysis can take a significant amount of time to master, but there are several critical points that you should understand as a beginner.
- First of all, fundamental analysis is based on economic releases. Government bodies or central banks publish the most important economic releases. These include interest rate decisions and statements, minutes from policy meetings, and speeches by central bank governors.
- Other essential data releases include inflation reports, employment figures, and retail sales data. These give us an insight into how an economy is performing at any given moment, which can help indicate the future direction for interest rates.
- There is also a wide range of other data types which can affect the financial markets, including confidence surveys, business sentiment indicators, and capital spending announcements.
- There is a wide range of news events and announcements that impact currencies. The most important events can be seen on the economic calendar.
In a nutshell, fundamental analysis is not that complicated, but it does take time and thought. A
forex trader has to read the economic indicators, economic reports, and statements of an economy to determine the prospects. If things look good, the trader might decide that the nation’s currency will appreciate, or they might decide to go short if things look bad.
Traders can use both fundamental and technical analysis to confirm their strategy. However, technical analysis gives much faster signals and, in general, can provide you with ideas for when to buy or sell a currency pair in a short time. By combining the two types of analysis, you should be able to enter the market at better times for your trades and follow them through better.