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When it comes to predicting price action, traders conduct technical or fundamental analysis. In this article, we will discuss the latter, what it means, what you need to conduct analysis, and how it can be used in forex trading.
When traders talk about fundamental analysis, they are referring to the study of economic and political factors that affect price action. Sometimes natural phenomena can also be added to the mix, as it also affects the economy. Traders usually zoom into the economic reports and indicators on whether the economy is growing or contracting. Because of that, economic releases usually result to reactions from the currencies involved since the data reveals if the return on the country's assets will increase or not and if demand will be high or low.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
Applying these kinds of analysis in forex trading is simple if you have a forex calendar. This calendar shows the events that you should expect and the potential impact on the currency pair. It shows if the particular release will result to a strong reaction from the currency involved or it might provide hints for bigger-tier events. For example, the gross domestic product is usually followed by a large reaction in price because it shows if the economy grew or not. On the other hand, smaller-tier reports such as manufacturing production simply give hints on whether the GDP might be strong or not, and thus has limited impact on price movements.
At the end of the day, you also have to consider the long-term perspective in using fundamental analysis. This helps you gauge how long the reaction to the report will last and if it supports the general sentiment for the currency you are trading.
When traders talk about fundamental analysis, they are referring to the study of economic and political factors that affect price action. Sometimes natural phenomena can also be added to the mix, as it also affects the economy. Traders usually zoom into the economic reports and indicators on whether the economy is growing or contracting. Because of that, economic releases usually result to reactions from the currencies involved since the data reveals if the return on the country's assets will increase or not and if demand will be high or low.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
Applying these kinds of analysis in forex trading is simple if you have a forex calendar. This calendar shows the events that you should expect and the potential impact on the currency pair. It shows if the particular release will result to a strong reaction from the currency involved or it might provide hints for bigger-tier events. For example, the gross domestic product is usually followed by a large reaction in price because it shows if the economy grew or not. On the other hand, smaller-tier reports such as manufacturing production simply give hints on whether the GDP might be strong or not, and thus has limited impact on price movements.
At the end of the day, you also have to consider the long-term perspective in using fundamental analysis. This helps you gauge how long the reaction to the report will last and if it supports the general sentiment for the currency you are trading.
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