Fundamental Analysis in the Forex market is the analysis of the market forces that affect the currencies. These market forces could be demand and supply forces. Future price movements are predicted based on the study of these forces and Forex Trading strategy is made accordingly to earn profit from the price fluctuation of the currency pairs. Fundamental Analysis is helpful to the beginners who are in the process of learning Forex Trading concepts. This analysis provides information about those economical and political events that influence the valuation of the currencies. Fundamental Analysis is the basic of economical and political changes because these can affect the price of currencies.
Economic conditions should be watched closely. GDP, imports, exports etc are the economic indicators that are used in fundamental analysis. The Traders and investors should derive the valuable information from the news sources. Words of other economists and politicians should also be considered. Some important people whose speeches are important for the traders and investors are the chairman of America’s Federal Reserve Bank, president of the San Francisco’s Federal Reserve Bank and secretary of treasury etc. If the demand remains the same then if the supply decreases, it results in increasing of the market prices and if the supply increases then it results in market prices going down. So the Analysis is used to study the demand and supply of the currencies.
Some other factors that are considered important by the Forex Fundamental Analysts are government policies, industrial production, international trade and interest rates etc. After the data is gathered and filtered from all the studies, the Fundamental Analysts can then construct a model to check the current value of one currency against another. Thus Analysis helps to answer important questions given below.
Which currency pairs should be traded?
Which news to trade and which not?
What is the right time to trade?
What will be the direction of the market movement?
As with any other method, strength and weaknesses are and so same is the case with the Fundamental Analysis also. The Analysis also has strength and weaknesses.
Strength of the Fundamental Analysis in Forex Trading
Fundamental Analysis is beneficial for the long term investments depending on the long term trends.
The Analysis helps the traders and investors to spot the currencies with good value.
Weaknesses of the Fundamental Analysis includes the following
Fundamental Analysis takes longer time to arrive at conclusions and the results of this Analysis should never be applied in the medium term or short term. Models of this analysis are time consuming.
Value of the currencies predicted depends on assumptions and if assumptions go wrong then there may be huge change in the valuation of the currencies. Assumptions could go wrong because of economical decisions, political situations and climatic conditions etc.
Fundamental Analysis is important and valuable but the traders and investors should be cautious in its application. The results of Fundamental Analysis should not be the only reason of trading. Always use the Fundamental Analysis with the support of technical analysis methods.