Fundamental Analysis in Forex Trading Explained
Fundamental analysis in Forex trading is one of the several methods you can use to determine the relative security and intrinsic value of a nation’s currency. This methodology is harnessed by potential investors to evaluate the relative future of a currency and make decisions based on that analysis. With fundamental analysis, you can examine currency pairs and evaluate exchange rate fluctuations in the Forex market.
What is fundamental analysis in Forex trading?
Fundamental analysis involves analysing the impact of various factors on the currency market, including economic, political, and social aspects. In Forex market fundamental analysis, traders keep an eye on news that affect market volatility that trigger potential trading or investment opportunities.
Economic indicators that affect fundamental analysis
Economic indicators are government data that states the economic growth of a nation. These fundamental indicators enable traders, analysts, and investors to assess current economic performances and predict future economic health. Since the economic health of a country is the prime factor for its currency exchange rate, stock market rates, crypto and CFDs market, the same can be identified through these economic indicators.
Consumer Price Index
The CPI measures the change in prices paid by consumers for goods and services during a specific time. A rising CPI means that the prices of goods and services have been increasing, which indicates inflation. This leads to a change in the government’s monetary policies as interest rates would also increase to curb the money flow in the economy. This would, in turn, strengthen the country’s position and attract investors and traders.
Gross Domestic Product
The GDP tells you the market value of all the services and goods produced within the country in a given time. It gauges the country’s economic health as it portrays the state of the country represented by a percentage rate. It represents the goods and services’ total market value along with the gross profit or loss that a country makes in a quarter or a year.
The Retail Sales data is different from the GDP as it gauges the consumer demand for finished goods by measuring the purchases of durable and non-durable goods. Moreover, services are excluded from this metric as this economic indicator measures catalogue, in-store, and out-of-store sales.
The industrial product is also a report that shows a production change in mines, utilities, and factories in a country. It reports the capacity utilisation of these institutions and helps identify how much a country is producing at a given period.
Key benefits of fundamental analysis in Forex
Gain a competitive advantage
Since fundamental traders research multiple factors influencing a currency’s exchange rate and fluctuation, they gain a competitive advantage over traders who do not conduct fundamental analysis. This is because fundamental analysis takes several factors into account simultaneously. Some examples include the country’s GDP, interest rates, employment level, housing sector, and more.
Spot ideal trades
Forex traders keep a close eye on economic news updates of several countries and identify ideal entry and exit points. Hence, they end up spotting the ideal trade opportunities that are often missed by most traders. For example, the US economy’s increased GDP is most likely to drive up the rate of USD, enabling Forex traders to buy more of the currency to take advantage of inflation.
Better information and risk managemente
Most fundamental traders believe that the data from fundamental analysis is quite reliable with respect to managing risk in the Forex market. This is because when you know the reason behind price fluctuations, you can better predict an asset’s movement. Since you have a better grasp on factors outside of market valuation to account for how a country’s currency will trade, it gives your predictions on trends and placing stop-loss orders a little more accuracy.
How to do fundamental analysis on Forex?
1. Research the country and currency you want to trade
It is essential that you understand the country’s economy of the currency you intend to trade. When you study a country’s economic background, political stability, and social conditions, you get an insight into the country’s economic health. This is your first step in deciding if you want to trade a specific asset or not.
2. Check for economic debt
The national debt of any country is known to be its number one public policy issue. When a country has high debts, its nationwide savings and income fall, interest rates increase, and the country's overall economic condition is not sound. However, a country with lower debts is considered more stable, which attracts traders and investors.
3. Find the currency’s top competitors
When you decide the currency you wish to invest in, it is advisable to study its competitors and find an alternate currency that might be performing better. It should have a solid future prospect, with the least ongoing market risk.
4. Analyse the currency pair’s future prospect
Fundamental analysis works well for trading long-term. After analysing the country’s growth prospects, GDP predictions and future plans, a trader can choose to invest in a currency that has a strong future prospect.
5. Monitor economic news and data regularly
Once you have invested in the currency pair of your choice, you need to monitor it timely. Keep a close eye on news updates about countries which currencies you trade, and check their financial performance.
Trade using fundamental analysis with Blueberry Markets
With fundamental analysis, you gain a better appreciation of the minute and sweeping details that can determine the fair value of the currency pair you want to trade. It’s an excellent way for traders to figure out which currencies they need to buy and sell, and which ones will potentially make them profit. Apply fundamental analysis with your trades at Blueberry Markets with our weekly newsletters, daily trade updates, and trading signal alerts. Sign up for a live account or try our risk-free demo account now.
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