Using Fundamental Analysis in Forex
Fundamental Analysis is the act of trying to read all of the economic, social, and political events that are going on in the World. The main focus of a fundamentalist would be the currencies that make up the currency pair they are trading. This means following all of the news events and data releases for two countries just to trade 1 pair, however if you are not trading a major currency pair with the USD as one half of it, you will have to follow a third also. An example would be if you were trading the EURJPY. Any major USD news events or data releases will still impact that currency pair due to the USD World reserve currency status. In a nutshell; a fundamentalist will read all of this information to determine which currency will appreciate and which currency will depreciate. They will then trade accordingly and this type of analysis is better suited to traders that prefer a much longer term approach.
Good Economy vs Bad Economy
For traders using fundamental analysis it is essentially a good economy vs bad economy approach. The combined news events and data releases for each country will affect its economic outlook. Quite simply; if a country’s current or future economic outlook is good, their currency should strengthen, if is not then it should weaken. The better the outlook the more foreign businesses and investors will invest in that country.
The raising and lowering of interest rates is key for each country to control it’s growth and inflation. Higher interest rates of course make any given currency more attractive to savers, any investment in that country even if it is not currency directly will mean more buying of their currency.
All of the above is of course based on logical thought but just to confuse matters you will sometimes witness the complete opposite happen, that is why technical analysis is preferred here at ElectroFX. When you boil it down; all of this fundamental information sets the supply and demand of each currency and supply and demand can be seen on a chart using technical analysis. Reading some charts is easier for most than trying to follow all of the economic, social, and political events of several countries. Awareness of important events and releases is still important though.
Understand Which Forex News is More Important
There are various data releases each month that hold more weight than others and when certain economic figure heads speak everyone listens. As a beginner the easiest way to understand what is of high importance and what is not is through an online economic calender. There will always be a color coded scale of importance along with the previous and forecast numbers and they are easy to understand. The following info link will take you to one to have a look.