When it comes to predicting price action, traders conduct technical or fundamental analysis. In this article, we will discuss the latter, what it means, what you need to conduct analysis, and how it can be used in forex trading.
When traders talk about fundamental analysis, they are referring to the study of economic and political factors that affect price action. Sometimes natural phenomena can also be added to the mix, as it also affects the economy. Traders usually zoom into the economic reports and indicators on whether the economy is growing or contracting. Because of that, economic releases usually result to reactions from the currencies involved since the data reveals if the return on the country's assets will increase or not and if demand will be high or low.
In particular, forex traders usually watch out for the release of major economic reports such as the GDP or gross domestic product, CPI or consumer price index, and other figures that give a comprehensive view on the economy. In addition, central bank statements which dictate monetary policy also impact forex movement. When a central bank says that they will hike rates or tighten monetary policy, it usually leads to a higher return for the domestic currency which also means higher demand. On the other hand, when a central bank says that they will cut rates or loosen monetary policy, it usually results to lower return for the domestic currency and hence lower demand.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
When traders talk about fundamental analysis, they are referring to the study of economic and political factors that affect price action. Sometimes natural phenomena can also be added to the mix, as it also affects the economy. Traders usually zoom into the economic reports and indicators on whether the economy is growing or contracting. Because of that, economic releases usually result to reactions from the currencies involved since the data reveals if the return on the country's assets will increase or not and if demand will be high or low.
In particular, forex traders usually watch out for the release of major economic reports such as the GDP or gross domestic product, CPI or consumer price index, and other figures that give a comprehensive view on the economy. In addition, central bank statements which dictate monetary policy also impact forex movement. When a central bank says that they will hike rates or tighten monetary policy, it usually leads to a higher return for the domestic currency which also means higher demand. On the other hand, when a central bank says that they will cut rates or loosen monetary policy, it usually results to lower return for the domestic currency and hence lower demand.
Using fundamental analysis in forex trading means that you will be needing a forex calendar. This type of tool lists the economic events that are scheduled for release and their possible impact on the currency pair. It also indicates if the release will result to a huge price movement or if will just spark a small reaction. After all, the GDP or gross domestic product tends to elicit a bigger reaction since it is the overall performance report on the economy. On the other hand, a small manufacturing production report might just yield a brief price reaction since it just offers clues on whether overall growth is likely to be strong or not.
Above all, fundamental analysis also requires taking the longer-term perspective into account. This helps the trader determine if the report will have a lasting and long-term effect on overall price action or if the reaction will fade within the next few hours.
EmoticonEmoticon