Three Types of Forex Market Analysis – Part 3

What is Fundamental Analysis in Forex?

There are two broad categories of analytics people use when trading Forex.

The first is called technical analysis, which usually refers to charts and tables — looking for patterns and trends.

The second is called fundamental analysis, which uses social, economic, and political analysis to interpret the Forex market and what it might do next. By looking at these factors, fundamental traders try to figure out which economies are doing well, and which are struggling — to predict which country’s currency will increase in value and which will decline.

The Basics of Fundamental Analysis

The basics of fundamental analysis are simple. If a country’s economy is doing well, then its currency value should increase. If a country’s economy is doing poorly, then its currency value should decrease.

When economies are doing well, higher interest rates are required to stem the tide of inflation and control growth. When interest rates go up, financial assets trading on that specific currency (such as the dollar when the Fed raises rates) are more attractive to investors.

To buy those assets, traders and investors need to convert their currency into that specific currency, increasing the demand for that currency. That causes the currency’s value to rise on the Forex market.

Looking at Macroeconomics and Geopolitics

Fundamental analysis involves analyzing the moves of a country and using those moves to predict the strength and weaknesses of that country’s economic outlook.

Economic, financial, and political news will impact that country’s exchange rates.

For example, if the Federal Reserve starts to spit out data regarding how certain industries are doing, fundamental traders might try to predict how this will impact interest rates moving forward. Then, based on that interest rate prediction, they will trade currencies using that as a fundamental point.

There are similar central agencies in other countries that play a role in their currencies, as well. By using fundamental analysis, it is possible to learn which economic data points tend to drive the price of the currency. By jumping on this information, traders can make significant amounts of money in the Forex market.

A Rule of Thumb and the Most Helpful Fundamental Analysis Tool

If there’s anything you take from this article, it should be this:

Strong national economy = higher currency value

Weak national economy = lower currency value

The most helpful tool and core to any fundamental analysis is a Forex Economic calendar — which displays upcoming news items, their relative impact on exchange rates, and projected data vs. real data.

Practicing Fundamental Analysis Takes Time

It is true that fundamental analysis takes time to perform well. There are some pieces of financial news that may sound interesting but might not impact the Forex market.

Furthermore, some countries’ currencies react differently to certain types of news, which can also make fundamental analysis a challenge. Like fundamental analysis in the stock market, this is something that is an acquired skill, but it can pay off with significant profits in the Forex market.