What's the importance of fundamental analysis in Forex trading? In fact, do we even know what fundamental analysis is? How can it help you in trading?
Read more about how you can use fundamentals in Forex trading. In fact, you can use fundamental analysis in every aspect of trading.
What Is Fundamental Analysis in Forex Trading?
- Do you know what fundamental analysis in Forex is? In Forex, fundamental analysis is the study to analyze the economic developments that can affect the value of a currency. Performing fundamental analysis a trader can determine the value of a currency. Which is the most important aspect of Forex trading.
When the information on an economic event is released, the investors try to adjust their portfolio according to that information. The traders that perform regular fundamental analysis in Forex remain in a better position.
A position to compare to those who ignore the importance of fundamental analysis and rely only on the technical analysis. Both are important.
1. What's Included?
Fundamental analysis includes analyzing the economic indicators released by the government or private organizations. These reports are released at a scheduled time and date.
They contain valuable information on the country’s economic health. By analyzing and predicting the economic indicators traders assess the value of the currency and plan their trades.
What Are Forex Indicators?
- Some of these indicators are the gross domestic product (GDP)
- Foreign exchange rates
- Import and export prices
- Industrial production/capacity utilization
- The composite index of leading indicators
- Employment rate
- Consumer credit
- The consumer price index (CPI)
- Retail sales
- Housing starts
- Factory order
- Interest rate decision
- The employment cost index
- Consumer confidence and so forth
These economic indicators have a marked effect on both the stock market and the Forex market. Some of these indicators are released weekly.
While others are released monthly or quarterly. What indicators help with fundamental analysis in Forex?
Their sources include the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the U.S. Department of Agriculture, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.
1. How Does Interest Rates Help Fundamental Analysis in Forex?
Let's look at the interest rates and how they affect the value of a currency. When the central bank of a country raises the interest rate it also increases the borrowing cost.
A higher borrowing cost means that there'll be less money to go around. As a result, the demand for the particular currency is likely to rise.
Higher interest rates also mean that investors will get higher returns on their deposits in the bank. To take advantage of the higher interest rates many investors would also want to buy that particular currency. Which further raises the demand for that currency.
2. Economic Indicators
As a Forex trader, you must take the economic indicators into consideration from several countries. The leading economies like the United Kingdom, Japan, France, and Germany also release their economic indicators.
They also have an impact on the Forex market. For example, leading economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.
Fundamental Analysis in Forex Final Thoughts
One of the simplest ways to start following the fundamentals is by using economic calendars. The Forex economic calendar provides the schedule of the upcoming economic events that'll occur over the day, week, and month.
In addition to the live data, an economic calendar also provides more details. Such as previous numbers, expected numbers and many calendars also provide some sort of indication that can impact the currency trading.
This is why fundamental analysis in Forex trading is important. When you know what's happening with the indicators and interest rates, you can trade Forex better.