Fundamental Analysis as a Forex Trading Formula

Fundamental Analysis

In fundamental analysis, the core underlying elements influencing the economies of particular entities such as bonds or stocks are taken into study. Government policy, economic indicators, societal as well as other factors within the framework of a business cycle will all be analyzed in order to predict price action.

Simply stated, fundamental analysis will delve into the inner workings of a system to deduce what makes it ‘tick’.

 

Making use of models

Economic conditions may be very efficiently predicted by making use of fundamental analysis methods though obtaining precise market prices may prove to be problematic with this system.

Gross Domestic Product (GDP) forecasts or employment reports may give one a reasonably accurate depiction of economic health and its’ motive forces but translating that information into actionable trade entry and exit points will still call for the more interpretation.

This interpretation is facilitated by the use of trade models which employ current and historic empirical data to forecast future prices.

Admittedly imprecise past a certain point, many traders will seek to validate their model predictions with technical analysis methods to discern with certainty whether price patterns support their hunches regarding entry and exit points.

 

Fundamental Forex Drivers

Of essential importance to any fundamental analysis, is the identification of those fundamentals that bear the most impact on a country’s economy and, by extension, its currency.

Some of the most relevant drivers in this class will include:

Oil price fluctuations

Countries whose industries rely on foreign oil for their energy such as the United State of America and Japan will have their production profit margins eroded by rises in international oil prices, consequently weakening their currencies.

Traders who are confident that the rising oil prices constitute a trend would do well to consider buying into commodity-based economies such as Australia, simultaneously selling off their oil-based holdings.

 

  1. Interest rate fluctuations

A typical strategy point for fledgling forex traders is keeping track of interest rate changes. Should a country increase its interest rates, increased foreign investor interest will have the effect of strengthening currency prices.

 

  1. Economic Indicators

Economic indicators are bits of economic and financial information being constantly produced both by government agencies and the private sector with the explicit aim of assisting market observers in their monitoring of the country’s economic health. For this very reason, this information is invaluable to any and all forex traders.

The volumes of data produced in this way may seem daunting to a trader, but, in reality, they will only be required to keep track of certain key indicators in order to maintain a comprehensive grasp of market conditions.

Now, indicators of this nature will fall into two classes; leading indicators which appear ahead of emerging trends and lagging indicators, which will manifest themselves after trends have established themselves.

 

Significant Economic Indicators include:

Industrial production and capacity utilization statistics:

Taking the major currencies of the world in combination, the manufacturing sector makes up a quarter of the world economy and thus the productivity and efficiency of a country’s industrial sector will bear a lot of weight in determining the health of its currency.

Gross Domestic Product (GDP):

Referring to the sum total of all goods and services produced by both foreign and domestic-owned companies within its borders, GDP will reliably reflect either the growth or shrinkage of a country’s economy.

 

Categories: Tutorials

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