When choosing stock investments, savvy investors rely on analysis and research to determine how stocks will perform in the future. When trading on the Forex market, traders must also rely on analysis to plan trading strategies. In the Forex market, there are two types of analysis: Technical analysis and Fundamental analysis.
Fundamental analysis basically comes from political and economical conditions that may affect currency rates. This analysis may come from a variety of sources, such as news reports, unemployment rates, policies, interest rates, inflation, growth rates, and economic policies.
With fundamental analysis, a trader is able to see a big picture concerning the economic conditions of a currency, and how that currency may move in the market. Fundamental analysis are then supported with technical analysis so that a trader is able to determine entry and exit points.
The Forex market currencies are greatly affected by the supply and demand of those currencies. This supply and demand also has an effect on the economic conditions around the world. Supply and demand is affected by interest rates, as well as how strong the economy is. The economy, in turn, is determined by the Gross Domestic Product, Foreign Investment, and Trade Balance.
Governments and academic sources release indicators. Indicators are measures of the health of the economy. These indicators are typically released monthly, but there are some that are weekly. Interest rates and International trade are the two most important indicators, although other indicators are the Consumer Price Index (CPI), Durable Goods Orders, Purchasing Manager’s Index (PMI), Producer Price Index (PPI), and of course retail sales.
Interest rates can affect the economy in two ways: they can either make the economy stronger, or make it weaker, and this in turn makes that currency stronger or weaker. If the interest rates are high, there are more foreign investments, which makes the currency stronger. However, high interest rates can be bad as well, causing stock investors to sell their stocks, which in turn has an impact on the stock market, and the overall national economical condition.
The trade balance can show a positive or negative balance. If there are more imports than exports, the trade balance will be negative. This is a good indication that the currency value will drop, as this means that money is leaving the country, instead of coming into the country.
The cost of living (CPI) also matters, as does the PPI, which is the cost of producing goods. The value of services and goods in a country is measured by the GDP, and the amount of currency available is measured by the M2 Money Supply. In fact, in the United States, there are 28 indicators that are used. Forex traders must make themselves aware of these indicators if they hope to be successful, as these indicators will help plan strategies.