When approaching the financial markets, traders usually either come from different camps. This would be either through fundamental or technical analysis backgrounds and traders will constantly argue which style is better but history has shown that the successful traders usually employ a combination of both these types of analysis in their repertoire.
If one were to read the most classic of trading books out there, “Market Wizards” by Jack Schwager, one would learn about Jim Rogers and Ed Seykota. Both were very successful traders but each were on complete opposite sides of the spectrum as Rogers was quite adamant about his belief in fundamental trading and that it would be impossible to make a living strictly as a technical trader. Rogers goes on to state that he never met a rich technical trader. Seykota on the other hand struggled when he stuck with fundamental analysis and only till he focused on the technical side did he actually start to make a living trading the financial markets.
As one can imagine, the reality is that it all really comes down to what works personally for your demeanor and financial situation. Throughout history, there have been many successful traders who employed both technical and fundamental analysis in their systems. In the following few paragraphs, we will go through the basic principles of fundamental analysis in the lucrative Forex market.
Let’s begin by defining fundamental analysis a bit more clearly. Basically the whole process is taking as much available information one can find through research about a security and determining its intrinsic value. This could be just financial and economic data but the best fundamentalists will also take into account industry information plus current events to determine the effect this all has on the security. In what we’re talking about here is the foreign-exchange market, the security in question would then be a currency. In order to properly analyze a currency, a good trader has to pay attention to key economic indicators as any fluctuations in these particular points will have a direct impact on the rise or fall of a currency. Mastering this will allow a trader to have a unique sense of a country’s currency intrinsic value so let us examine this further.
The Importance Of Interest Rates
Out of all the valuable points, interest rates will have the largest impact in the long term over any currency. Every month, most Central Banks will announce these rates which market participants will be watching keenly to plan ahead. The purpose of adjusting interest rates for Central Banks is to control the supply of money in their economy. By lowering the interest rate, money supply will increase while the opposite is true when they raise interest rates.
GDP – Gross Domestic Product
By paying particular attention to the GDP, one can quickly assess the economic health of a country. Each country’s Central Bank will have made market predictions about their annual growth which is put on public display in their GDP numbers. One can be confident that if the GDP of a country falls below expectations, the currency values should tend to fall in alignment with that fact. If on the other hand that the GDP beats out expectations, the value of the national currency tends to rise.
One of the most insidious things to watch out for is the effect of inflation on an economy as it hampers a currency as it’s purchasing power is diminished. This one rightfully can assume will be very bad for an economy. Normal inflation of 2 to 3 percent is acceptable but if inflation goes beyond that, higher interest rates will soon come after in order to control this. Currency values mostly rise in expectation of rate hikes so knowing this can be very fruitful for a trader.
Employment is the backbone of economic growth so when unemployment numbers increase, this is a sign that the economy is in trouble. Less money will be circulating so in order to stimulate more money flow, interest rates are usually cut.
Consumer Demand Levels
Without consumer demand, there is nothing to drive economic growth so keeping this level normal and trucking along is the responsibility of any smart government. It makes sense that when consumers are buying and demanding certain goods, it is good for the economy.
While we have only briefly covered some important points for a grounding in fundamental analysis, there is much more to learn. The best Forex courses will cover deeper insights into how these emerging fundamentals can drive price behavior. Even avid technical traders can appreciate the value of this.