Forex Fundamental Analysis: How The Economy Affects Forex Trading

By Albert Schmidt

Most Forex traders belong to one of the two type of traders. One type uses only technical indicators. The other one uses fundamental and trades the news. The first group argues that technical analysis is enough to give a good prediction of the market move. The second group on the other hand, states that it is fundamental news that actually move the price. I can state from my personal experience that both types of analysis of equal importance.

In simple words the difference between the fundamental analysis and technical is that fundamental analysis considers the world economy while technical analysis looks at charts. In this article I would like to cover how different fundamental or economic factors or economic factors can affect your trades.

I think at the very basic level of understanding it is clear for everyone that a nation's economic status will have an effect on the value of that nation's currency. A good economy results in strong currency, just as a company's stocks will rise in value when that company is doing well.

If you've been in Forex for any length of time you probably already know that when you look at the price charts at the times of important economic news releases, you will see increased volatility. These kind of news include Gross Domestic Product, trade balance, interest rates, payroll employment, etc. Most of these news have predetermined days of release so you can schedule your trading accordingly if you want to take advantage of volatility of those times.

Any serious trader needs to keep track of those news releases not only in home country but also in those countries whose currencies are extensively involved in currency exchange market. Therefore you can not rely only on the local publications. You will need special economic publication or you can use the Internet as an alternative.

On the other hand, it is not only the economy that influences the value of currency. Social and political forces also have a strong influence on a nation's currency values. Such events as election, civil disturbances, or a natural catastrophe can cause high volatility in currency values.

Usually it is very difficult if not impossible to predict the impact of these events, but you can still base your trading around what is likely to happen after the event. You can backtest your system based on such fundamental news releases to see if that approach can be profitable.

If you want to base your trading on analysis of fundamental indicators and their influence on value of currency then you need to be the type of person who enjoys following the financial, political and economic news.

The opposite approach would be to use information about upcoming events to avoid trading at those times. Usually people who base their trading purely on technical analysis would recommend avoiding trading at the times of those events. But you still need to know what is happening, in order to keep out of the market. Therefore even if you trade only using charts and technical analysis, Forex fundamental analysis is important.

Albert Schmidt is a successful trader in Forex market for a few years. Learn more how you too can learn Forex trading at his website

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