FOREX Trading Fundamental Analysis Introduction

Fundamental analysis is the most difficult aspect of Forex interpretation. It requires an extended period of learning fundmental concepts and their impact on the Forex market.

To learn a fundamental style of trading completely would require years of experience. So how can you take advantage of fundamental concepts without having those years of experience?

So what does fundmental analysis do ? Fundamental analysis uses “economic indicators” and other news related information to determine an impact on Forex prices. These “economic indicators” are published at regular intervals and many of the international banks use this data to forecast forex trends. The economic indicators measure how well an economy of one country with another. The status of an economy will influence its exchange rate, so fundamental analysis provides us with ways to measure potential forex trends.

When this data is made available to the public there is a reaction from investors and speculators. Information in the form of news and economic indicators is vaguer than that of technical indicators. There is a lot of gray area in this type of analysis. The market will ultimately react to how people think the economic data compares to the current market situation.

Economic indicators usually reveal information that “ Should cause a currency to go up in price” or “May cause a currency to go down”. The words ‘should’ and ‘may’ in the quote above reveal the ambiguity of the fundamental data.

Here is an example of what analyzing fundamental data is like. Let’s suppose there are six economic indicators (there are a lot more). Let’s call our six indicators A, B, C, D, E, and F. Now we wait for the data from our indicators to be published in a financial magazine or at an online source. We manage to get the readings for our economic data for the EURO:

Indicator A: is in a range where the Euro may go up
Indicator B: is in a range where the Euro should go up
Indicator C: is in a range where the Euro could go down
Indicator D: is in a range where the Euro usually goes down
Indicator E: is in a range where the Euro could go up
Indicator F: is in a range where the Euro may do down

By looking at the above indicators, you donj’t know what the Euro is going to do. Furthermore, currencies are always traded in pairs. You would have to get fundamental data for another currency pair and compare it with the EURO to make a trading decision. I think you can appreciate that this is no simple task.

I do not want to discourage you away from fundamental data. The best way to lean is one piece at a time. Eventually you will build a puzzle from all of the fundamental and technical data and make more informed trading decisions.

At this point I am going to list some of the most commnly used fundamental indicators (sometimes referred to as economic indicators).

1. The Gross National Product (GNP). This number represents the total financial position of an entire country. This is probably the most referred to economic indicator ( although by itself it does not provide enough info to make decisions).
2. The Gross Domestic Product (GDP). Basically this is the GNP for the United States. This measure is still referenced , but is almost completely phased out of use. The term GNP has been used to represent GDP as well.
3. Consumer Price Index (CPI). Measures retail prices in a country.
4. Producer Price Index (PPI). Similar to the CPI, but for wholesale prices.
5. GNP & GDP Deflator. Readjusts the GNP & GDP for inflation.
6. Industrial Production (does not have an acronym).
7. Capcity Utilization
8. Unemployment rates also have an impact on foreign currency exchange rates.
9. Personal Income has an impact on foreign currency exchange rates.
10. Consumer Spending Indicators also influence Forex prices.

These are just a handful of economic indicators used in fundamental analysis.

If you do not like the concept of fundamental analysis, you can certainly skip it altogether. There are plenty of purely technical systems out there for you to trade with. A key concept to technical analysis is that all of the fundamental data is ultimately revealed in the price anyway. And if you have a system that must be triggered when the price goes up or down, then you have a great tool.

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