Using Fundamental Analysis in Forex
Fundamental Analysis is the act of trying to get a read on the economic, social, and political events that are going on in the World. The main focus of a fundamentalist would be the currencies that make up the currency pair they are trading. This means following all of the news events and data releases for two countries just to trade 1 pair. If you are not trading a major currency pair with the USD as one half of it, you will have to follow a third also. An example would be if you were trading the EURJPY. Any major USD news events or data releases will still impact that currency pair due to the USD World reserve currency status. In a nutshell; a fundamentalist will read all of this information to determine which currency will appreciate and which currency will depreciate. They will then trade accordingly and this type of analysis is better suited to traders who prefer a longer-term approach.
Good Economy vs Bad Economy
For traders using fundamental analysis, it is essentially a good economy vs bad economy approach. The combined news events and data releases for each country will affect its economic outlook. Quite simply; if a country’s current or future economic outlook is good, their currency should strengthen. If is not then it should weaken. The better the outlook the more foreign businesses and investors will invest in that country.
The raising and lowering of interest rates is key for each country to control it’s growth and inflation. Higher interest rates, of course, make any given currency more attractive to savers. Any investment in that country even if it is not currency directly will mean more buying of their currency.
All of the above is, of course, based on logical thought, but just to confuse matters you will sometimes witness the complete opposite happen. That is why technical analysis is preferred here at WaveFX Trading. When you boil it down; all of this fundamental information sets the supply and demand of each currency. Supply and demand can be seen on a chart using technical analysis. Reading the charts is easier for most than trying to follow all of the economic, social, and political events of several countries. Awareness of important events and news releases is still important though.
Understand Which Forex News is More Important
There are various data releases each month that hold more weight than others and when certain economic figureheads speak everyone listens. As a beginner, the easiest way to understand what is of high importance and what is not is through an online economic calendar. There will always be a color-coded scale of importance along with the previous and forecasted numbers which are easy to understand. The following info link will take you to one to have a look.