Forex Fundamental Analysis

Forex Fundamental Analysis

There are two major methods of analysis used in forecasting the behavior of the Forex market; they are Technical analysis and Fundamental analysis.

They differ greatly but the trader can apply both to complement and supplement the study of the market for achieving superior results.

They also have the same goal i.e. to predict a price or movement of the market. The technical analysis studies the effect while the fundamental analysis studies the cause of market movement.

Fundamental Analysis has a very broad spectrum. One aspect looks at the general or qualitative factors; the other side considers tangible and measurable i.e. the quantitative factors.

Use Fundamental Analysis With Technical Analysis

In general the fundamental analysis method looks to forecast the future of price movements based on events that have not taken place yet. Important factors and statistical methods are used to predict how these events will affect supply and demand and the rates of the Forex.

We must remember that Fundamental analysis and Technical analysis are not the reliable factor on their own, but each needs to be used in conjunction with the other to form opinion about the changes in the Forex market.

Fundamental analysis is therefore the method of forecasting the future price movements based on economic, political, environmental and other relevant factors and statistics that are going to affect the basic supply and demand of the market.

A fundamental analysis involves in-depth study of the market. It focuses on what is going to happen in a market based on supply and demand, seasonal cycles, and weather and government policy.


Predicting Future Forex Trends For Profits

Fundamental analysis can be defined as the macro or strategic assessment of where a currency should be trading based on the movement of the currency's price itself.This is often highly dependent on the economic condition of the country of that currency, monetary policy, and other "fundamental" elements.

The analysis is performed on historical and present data, but the objective is to predict the future trend.

Economy condition reflects how the country is attractive for foreign investments and capital inflow. In general it can be said that the better the macro economic indicators – the stronger the domestic currency is.

According to Fundamental analysis, the markets may misprice in the short run but the "correct" price will eventually be reached. Profits can be made by trading the mispriced and then wait for the market to recognize its "mistake" and reprice the security.

Traders may use fundamental analysis within different portfolio management styles. Buy and hold traders find out 'good' buys from the past trend which can lower their risk and probability of wipe-out. In fundamental analysis you make your own decision rather than going by the apparent movement of the market.


Analyzing Economics and Macro Forex Factors

With fundamental analysis, one can find out if the prices in the market are undervalued, overvalued, or working in a fair value by applying the concept of intrinsic value as the market price tends to move towards its intrinsic value. If the intrinsic value is above the current market price, the investor would purchase the currency and if it is below, the investor would sell it from the portfolio or take a short position.

A top-down trader starts the analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. The bottom-up investor starts with specific currency pair, regardless of their current position.

So we come to the conclusion that as a trader in forex market one would require to take help of Fundamental analysis along with Technical Analysis methods to maximize the gain by correctly recognizing the market trends.

We will now look at the practice known as Technical analysis which we have mentioned so often in this section. Click the 'Next' button below to continue.