An Introduction to Fundamental Analysis Written For Newcomers To The World Of Forex Trading

It is usually said that the secret to successful Forex trading is information but, while accurate and up-to-date information is indeed vital for currency trading, it is the analysis of this information which is the real key. There are currently two main types of analysis which are used in currency trading � fundamental analysis and technical analysis - and here we are going to look at just what is meant by fundamental analysis.

At its simplest, fundamental analysis scrutinizes political and economic conditions which might have an affect upon currency prices and Forex traders who make use of fundamental analysis rely upon news reports for information about a range of things including inflation, economic policy, growth rates and employment rates.

Basically, fundamental analysis provides an overview of currency movements together with a broad view of economic conditions that could well affect the value of a specific currency. With this view to hand, foreign currency traders will then normally go on to make use of technical analysis to plot entry and exit points into the market and to augment the information gained from fundamental analysis.

The foreign currency market is much like any other market and is affected by the forces of supply and demand, which are themselves affected by economic conditions. Two economic factors affecting supply and demand are interest rates and the strength of the economy and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the country's balance of trade.

Many different economic indicators are released by governments and by other sources and are generally considered to be good measures of economic health which are followed by all sectors of the investment market. The majority of economic indicators are released monthly although a few are released more often and normally weekly.

Two of the main fundamental indicators are interest rates and international trade figures, but other particularly helpful indicators include the consumer price index (CPI), durable goods orders, producer price index (PPI), purchasing manager's index (PMI) and retail sales.

Interest rates are an especially important indictor because they can have a weakening or strengthening affect on a particular currency. For example, high interest rates might attract foreign investment and strengthen the local currency, while stock market investors frequently react to increases in interest rates by selling in the belief that higher borrowing costs will have a bad affect on many companies. High volume selling by stock market investors can often lead to a downturn in the stock market and the national economy.

International trade indicators are also particularly important to the foreign currency trader. A shortfall on the trade balance, indicating that imports have exceeded exports, is normally seen to be an adverse indicator as money flowing out of the country to purchase foreign goods might well have a devaluing affect on the currency. However, fundamental analysis will also indicate the expectations of the market and these will generally determine whether a trade deficit is unfavorable. For example, it may be the case that a particular county normall operates with a trade deficit and that this fact has already been factored into the price of its currency. Generally, trade deficits will only affect currency prices in cases where they are higher than the market would ordinarily expect.

Each country has its own particular set of economic indicators (at this time there are in the region of twenty-eight major indicators used in the US) and these strongly influence the financial markets. For this reason, Forex traders have to be conversant with them and examine them with great care when they are preparing their trading strategies.

Fortunately, for those traders working online, many sites now carry an abundance of up-to-date information, but it is up to individual foreign currency traders to extract this information and apply fundamental analysis to it to make their trading decisions.

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