Fundamental Analysis - The Basics

The forex trading business has forex traders analyzing the markets through a myriad of ways and techniques.

Their methods generally fall into one of three categories :-

Fundamental Analysis
Technical Analysis
Both techniques combined

While all three methods have their good points, a forex trader that has a good understanding of both technical and fundamental analysis principles generally is able to gain a better picture from the forex markets.

Fundamental analysis looks at the driving factors for each currency. The factors that drive currencies are all economic and political in nature.

This is the primary reason why the forex markets react to economic releases such as non farm payroll, unemployment rate data and retail sales data.

While the economic situation of a country greatly affects the performance of a specific currency, the domestic political situation also can move currencies with great effect.

Political upheaval, disease, natural disasters all can have an effect and are taken into consideration in fundamental analysis.

The problem with fundamental analysis is simple. It requires a good understanding of macroeconomics, microeconomics as well as market sentiment to properly benefit from it.

Central banks and the monetary policies they implement have a huge effect on the forex markets. How the markets react to such policies is generally the same regardless of what central bank you are concerned with.

Forex fundamental traders analyze all this information and make a decision based on it. Key factors such as interest rates and international trade are scrutinized carefully.

The forex markets can react rather violently to news releases that have a big impact. On some currencies, a spike of 100 pips or more are common.

More impressive is the whiplash that can sometimes occur as there is mass buying and selling that occurs one after another.

A hundred pips and a hundred pips the other way in a matter of seconds. Especially on volatile pairs such as the Pound/Yen.

This is a basic overview on fundamental analysis as the topic is too large to encompass in a single article.

Needless to say, reading about how markets react to economic factors would further sharpen the forex traders skill set in this area. It also pays to notice future economic news releases as important releases would surely affect the forex markets.

Economic calendars can be found in various websites but the staff at i-Forex-Trading.com recommend the excellent calendar provided by the popular forex forum, www.forexfactory.com.

For a deeper understanding on fundamental analysis as well as technical analysis, the staff at i-Forex-Trading would like you to pay a visit to Investopedia.com. They have an excellent article on the topic that can be found here.