FX Fundamental Analysis: What, How and When? Learning Guide for Beginners

May 23, 2016

Here is an Article to let you understand "What is Fundamental Analysis".

FX Fundamental Analysis: What, How and When? Learning Guide for Beginners

While technical analysis puts emphasis on the effect of market movement and predicting trends in the short term usually less than three months, fundamental analysis focuses on the causes of such movement in the long term.

And while one method maybe enough, many traders who have been successful in currency trading use a combination of these two techniques.

What is “Fundamental Analysis?

Fundamental analysis is concerned about predicting the future price movements of a financial instrument.

It takes into account the economic, political, environmental situations of the country the currency represents and other vital factors and figures that affect the supply and demand.

Specifically, interest rate adjustments, international trade and the gross domestic product or GDP are what Forex traders consider in making their price forecasts.

What Fundamental Analysts do?

A fundamental analyst, therefore, needs to make a more detailed study of a market compared to a technical analyst.

As fundamental analysis is all about the future market, it considers a number of factors in determining price trends – seasonal cycles, weather, supply and demand and government policy.

It assesses, in particular, the direction of currency trading based on any criteria except the price of the currency.

Examples of Fundamental Analysis…

As an example, a Forex fundamental analyst for a certain currency studies the supply and demand for a country”s currency, products or services.

He or she also considers that country”s management and government policies, historic and forecasted performance, future plans and all other economic indicators.

After gathering the data, the analyst then comes up with a model to identify the present and forecasted value of a currency against other currencies.

What normally happens is that an increase in supply without corresponding increase in demand leads to a lower currency value while a rise in demand without matching rise in supply leads to a higher currency value.

Fundamental = “Capital Flows” & “Trade Flows”

Fundamental analysis covers two subcategories – capital flows and trade flows.

The capital flows of a country refer to the net quantity of currency which is traded via capital investments.

These investments include fixed income market and equity market investments which form part of the flow of portfolio investments and international government bonds as well as third party licensing agreements, joint ventures and foreign direct investment which are the physical flows of capital indicating stability and growth.

The trade flows, on the other hand, are also known as current accounts that have the most influence in price movements.

They measure the net of imports and exports of a certain country and their impact on the currency”s value.

It is in this line that international trade serves an important function as importers need to sell currency used to purchase goods and services that are being exported.

It is also for this reason that countries with positive trade flows or those with exports greater than their imports have surpluses that ultimately contribute to their increased currency.

50 USD for Free

123 USD for Free

$30 for Free

3500 USD for Free

88,8 USD for Free

up to $1000 for Free

Partner brands