In forex trading, there are two main types of analysis: fundamental and technical. This article will focus on what fundamental analysis is all about, which tools will help you conduct fundamental analysis, and how it can be applied to catching profits in the currency market.
Fundamental analysis refers to the study of various factors, such as economic, political, and even natural phenomena, that can affect price action. Most fundamental analysts focus on the economy and the different reports that can indicate whether the country is performing well or not. This is why economic data plays a key role in forex price action, as it determines whether the return on the currency will increase or not and if demand will rise or fall.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
Fundamental analysis refers to the study of various factors, such as economic, political, and even natural phenomena, that can affect price action. Most fundamental analysts focus on the economy and the different reports that can indicate whether the country is performing well or not. This is why economic data plays a key role in forex price action, as it determines whether the return on the currency will increase or not and if demand will rise or fall.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
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Want to learn more about forex trading, then visit Steve Hall's site on and learn the fundamentals of forex.
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