There are basically two different ways to analyze the forex markets, fundamental analysis and technical analysis. In this article I am going to talk a little bit about fundamental analysis.
What is fundamental analysis? Fundamental analysis is a type of market analysis where you study the economic situation of different countries. You try determine the present and the future value of a currency by social, economic, and political variables. Fundamental analysis is suited for forecasting long-term movements. Fundamental analysis requires a basic understanding of supply and demand and what things affect those.
Fundamental analysis in usually broken down into two different categories: capital flow analysis and trade flow analysis. In capital flow analysis you analyze are capital flow going in or out from the country. If capital is flowing in to the country that means people are investing and currency is strong. And vice versa. In trade flow analysis you are trying to analyze the trade flows. If export > import (positive trade flow) it is good for the currency. And vice versa.
General in forex market the most important fundamental things to watch for is:
#1 Economic calendar (contains the info on when different stats are going to be published)
#2 Speeches (from FED or European Central Bank)
#3 Interest rates (rising interest rates -> currency will strengthen)
#4 Employment situation (decrease in the payroll -> weak economic -> lower interest rates -> currency will weaken)
#5 Trade balance and budget (significant trade balance -> weak currency)
#6 Gross Domestic Product (high GDP growth -> high interest rates -> strong currency)
#7 Retail sales (first indicator of the strength of consumer expenditure)
#8 Durable goods (rising durable good orders -> strong economy -> rising interest rates -> strong currency)
What to do with this data? Well, the most important to thing to keep in mind is that you actually follow the data! Look the economic calendar and don't trade if there are some stats coming. Wait and see first. Know which indicator is rising / falling and is there any difference between the expected and actual results (if there is, market will usually correct). Find out what is the indicator most traders are watching and look those same indicators. Popular one is interest rates and inflation indicators. Other traders will watch those, so they have an impact to the prices. Also pay attention to any news during the day, this currency markets can move fast.
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