Fundamental Analysis in Forex Trading
In order to make profitable trades, forex traders examine certain changes that could help them make gains out of the most volatile market in the world. Forex analysis is so necessary to complete the goals of making profits, includes few types of analysis. Fundamental Analysis and Technical Analysis are the two important forex analysis, careful study of which could result in gains otherwise can lead to losses. Both the type of analysis has its devoted users while there are traders who make both the analysis to trade.
Fundamental Analysis involves studying the economies of the world, its official economic data reports, and news to determine the health of an economy, ultimately the strengthening or weakening of the currency. Technical Analysis involves analyzing the charts and identifying similar price trends that have happened before and determine the present and the potential price movement. Much like analyzing the charts with the idea that “history repeats itself”.
Let’s look more into Fundamental Analysis here.
When you make a fundamental analysis, you would have to look into the economic, social, and political situations of the economies, find the answers, and apply it to your decision to place the trade. Ways to get the information on these significant situations of the economies is through the economic data reports which can give you an idea of the currency of an economy is strengthening or weakening; traders can use economic calendars and visit economic news website to get the updates.
Smart analysts already have a consensus even before the reports are released. Pieces of information on GDP, Non-Farm Payrolls (NFP), Purchasing Managers Index (PMI), Institute for Supply Management surveys (ISM), and inflation data are some of the major fundamental indicators to decide on placing a trade.
GDP that is reported quarterly for most countries gives you an indication of which direction the economy is moving and where it may go in the future comparing with the previous quarters. It is useful for long term traders. Currency traders look for positive and negative economic growth to find the best opportunities to go long or short a currency.
NFP released on the first Friday of every month can produce extremely volatile movement in the markets. While some traders place trades before and during non-farm payrolls, some traders wait till these shock waves diminish.
Purchasing Managers Index (PMI) surveys in Europe & China and Institute for Supply Management surveys (ISM) surveys in the US release data usually the first week of every month with a varying day of the release in each country. These surveys tend to have a close relationship with GDP and are a timely signal of the positive and negative growth in an economy.
Inflation data is usually released in the middle of each but can vary to different countries like Australia and New Zealand where it is released quarterly. There are two types of inflation to look out for – Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI data measures changes in prices paid by the consumer for goods and services. The PPI data measures changes in prices of items as they leave the factory gate.
These are some of the useful ways to get information for the fundamental analysis that traders can use to decide to place the trade. In our next blog, we will look into technical analysis for forex trading in detail. Stay updated!