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A Basic Introduction to Fundamental Analysis Aimed At Newcomers To Forex Trading

It is often said that information is the secret to successful Forex trading but, although correct and up-to-date information is indeed essential for foreign currency trading, it is the analysis of this information which is the real key. There are currently two main types of analysis used in currency trading � technical analysis and fundamental analysis - and in this brief article we examine precisely what is meant by fundamental analysis.

At its simplest, fundamental analysis examines political and economic conditions which could affect foreign 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 and a broad view of economic conditions which might well affect the value of a specific currency. With this view in mind, foreign currency traders will then generally go on to make use of technical analysis to then plot entry and exit points in the market and to extend the information gained from fundamental analysis.

The foreign exchange market is much like any other market and is governed to a large degree 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.

A variety of economic indicators are published by governments and by other sources and are normally considered to be reliable measures of the health of an economy which are followed by all sections of the investment market. Nearly all economic indicators are published monthly although some are released more often and generally weekly.

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

Interest rates are an extremely important indictor as they can have a strengthening or weakening affect on a particular currency. For instance, high interest rates may attract foreign investment which strengthens the local currency, while stock market investors normally react to increases in interest rates by selling in the belief that higher borrowing costs will have a harmful affect on many companies. Large-scale selling by stock market investors can quite often result in a downturn in the stock market and the national economy.

Indicators of international trade are also particularly important for the foreign exchange trader. A deficit on balance of trade, showing that exports levels are below those for imports, is generally seen to be an unfavorable indicator as money leaving the country to buy foreign goods may well have a devaluing affect on the currency. However, fundamental analysis will also indicate market expectations and these will generally dictate whether or not a trade deficit is unfavorable. It could be the case, for instance, that a particular county frequently operates with a trade deficit and that this fact has already been factored into the price of its currency. In general, a trade deficit will only affect currency prices in cases where they are higher than the market would ordinarily expect to see.

Every country has its own particular set of economic indicators (there are presently in the region of 28 major indicators being used in the US) and these have a strong influence on financial markets. As a consequence, Forex traders have to be conversant with them and examine them with great care when preparing their trading strategies.

Luckily, for traders working on the Internet, many websites now carry a wealth of the latest information, but it is up to individual Forex traders to take this information and then apply fundamental analysis to it before they make their trading decisions.