Forex Fundamental Analysis
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There are primarily two schools of thought that most traders utilize when trading forex. They are called Fundamental and Technical Analysis. Forex Fundamental Analysis tends to focus on a broad spectrum of economic factors that influence the supply and demand of currencies around the world. Technical Analysis involves the study of pricing charts and historical data in order to better predict and profit off of current price fluctuations.
Fundamental Analysis is the Serious Way
Most traders that use Fundamental Analysis buy and sell currency based on the long term. Forex Fundamental Analysis traders focus on the overall state of economy and trade by relying on information and data associated with each measurable component of the economy. A few of those components include natural resources, the labor force, and the role of government on an economy.
How the Price of Natural Resources can Impact Currencies
You may be wondering how natural resources affect the forex market. You may not think that higher oil prices translate into anything much other than higher gas prices at the pump; however, it has a huge effect. When the price of oil was at an all time high recently, the U.S . economy almost crippled. As a result of higher oil, everything cost more. The U.S. Dollar also weakened because more American currency was needed to convert into the currencies the countries that exported oil. Okay, so why is this important in Forex Fundamental Analysis? There’s only one answer. You can make a lot of money. Traders that bet against the U.S. Dollar during that time made a killing. Who knew you could make money by just being on top of the daily news?
How can Government Policies Effect Currencies ?
The role and effect that governments have on economies around the world are also important to traders who utilize Forex Fundamental Analysis. Why? This is because the tools and policies that governments have to manage their respective economies have a direct impact on pricing of not only goods and services, but currencies as well. In the United States, the government relies on fiscal and monetary policies to guide the economy. Fiscal policy includes anything related to government spending and taxation, while monetary policy is used to adjust interest rates and to ultimately control the money supply.
Last Example
Consider an announcement by the government to increase interest rates. This would be considered monetary policy, but why should that matter to traders who utilize Forex Fundamental Analysis? It matters because an increase in interest rates will generate demand for dollars. An increase in demand for dollars will ultimately strengthen currency. Now consider an announcement by the government to raise taxes using fiscal policy. Raising taxes will translate into a decrease in demand for dollars and ultimately weaken currency. In either situation, whether or not the currency strengthens or weakens, the price will ultimately fluctuate relative to other currencies around the world. Price fluctuation equates to PIPS, which to a forex trader should mean only one thing. Money.
Trading in the Foreign Exchange Market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the Forex market. Don’t trade with money you can’t afford to lose.
