No serious discussion of forex trading would be complete without talking about the subject of fundamental analysis, and it's bearing on the markets. Forex traders should always keep their "finger on the pulse" of what is going on behind the economic scenes of the various countries whose currencies they trade.
Fundamental Analysis can best be defined as the study of the underlying economic and political factors that influence a particular currency. The goal is to attempt to predict price action and trends by looking at many different economic indicators and governmental policies.
Fundamentals for a currency may include interest rates, central bank policies, employment figures, and Gross Domestic Product numbers. These statistics are made public on a regular basis by most governments, and are watched closely by the astute foreign exchange trader.
Why bother with fundamental analysis? The simple answer is because only by looking at the fundamental factors that influence currency prices can you gain an accurate long-term view of where the prices are going.
It gives you the "raw material" as to what is driving prices, but it still does not give a trader the entry and exit points of his individual trades. It will help the trader, though, in developing a plan based on his unique trading strategies and goals.
Many of these economic reports are watched closely by traders, and can sometimes have huge short-term effects on market movement. Some astute forex traders will trade the markets at the time of these releases, hoping to make quick profits from the huge moves that often occur.
Unless you are experienced in trading, and familiar with the huge price swings during these report releases, it is best to stay out of the markets until they settle back down to their normal price movements.
The two releases in the US that tend to move the markets the most are the Employment report and the Federal Open Market Committee (FOMC) meeting minutes release.
While on the surface it might appear necessary that a trader needs an advanced degree in economics, actually a few simple guidelines are all that is needed to make sense and trading decisions based on this data.
Does the data strengthen or weaken the currency of that country? What are the long-term stated goals of that country's policy makers? Do their policies and data support more investment in that country, or make investors more wary of putting their money there?
Fundamental analysis can certainly appear to be a confusing subject and best left to professional economists. However, the retail forex trader can glean enough information from monitoring the major indicators to more accurately predict the strength or weakness of a particular currency. It is a fascinating and never ending study, to be sure!
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