You must have an understanding of the fundamentals of trading in order to effectively have an investment strategy on the foreign exchange market.
Trading is not the same as a foreign exchange investment strategy. A trader uses technical analysis to trade foreign currency in order to make a gain in a shorter period of time. On the other hand, an investor can use fundamental analysis on the foreign exchange market in order to decide which currencies they should invest in so that they will make a profit in a longer period of time.
Investment Strategy on the Foreign Exchange Market:
When you study the economic situation of a certain country in order to make trading decisions then you are using fundamental analysis. An economic calendar is published based upon the predicted outcomes of published economic information, political and social events, information that is presented by political and economic figures. Some of that information might come from the manufacturing output of a certain company or economy, an increase in prices of housing and an increasing number of purchases of homes, what inflation and interest rates are doing to the economy, what the forecasted cost of oil is, what the employment rate is, what the country’s budget deficit is, how confident consumers are in their own economy and how much money they are spending, and what the country’s trade balance might be.
Investors on the foreign exchange market will look at all of these things when they’re making an investment decision. They are looking for a long-term trade and are not looking for day trades and short-term market decisions. They try to use fundamental analysis to assist them with these decisions.
As you can see on the below chart, based upon published economic data, the currency pair is vacillating back and forth without an obvious trend. This is because all economic data can have a small, short term impact. If you look at the second chart, though, you can see a broader time frame where a larger trend is much more obvious.
There are always opportunities for investment. If you have used fundamental analysis to make your trade decisions then you can take advantage of available profit. For example, if you had made the decision to invest in Australian currency in 2009 while most of the rest of the world economies were struggling financially, then you would have made quite a bit of profit in a matter of months.
You can use fundamental analysis to insure a return on your investment in the foreign exchange market as long as you have a basic understanding of how to properly use it.