What is Fundamental Analysis and why is important in forex trading

Fundamental analysis uses the news to analyze the foreign exchange market to conclude what traders currently feel about the market and what direction they feel the market is going to take.

Fundamental analysis is based upon economic information and news. Economic news produced in a country can shape the opinion of investors and traders who operate within that economy. Through the shaping of their opinions, the market can have an impact on the currency of that nation. Positive economic news can result in an increased amount of confidence in the currency and economy of a nation. Inversely, negative economic news can result in traders exchanging the currency that they lack confidence in for one that they might feel more secure about.

News stories about Gross Domestic Product, Manufacturing and Employment numbers, retail sales, intervention by banks, decisions about interest rates, reports about inflation and trade balances, reports about terrorism or major natural disasters and information about political unrest can all have an impact on the economic status of a country.

How can Fundamental Analysis result in a profit from the foreign exchange market?

Identifying public opinion of the currency market is an integral part of fundamental analysis. Traders make the decision about whether or not they will retain a currency based upon their opinion of that country’s economy. Traders receive the news as soon as the public does. If that news is positive and the inclination is that the currency will remain strong, then traders will hold onto it, other traders will start purchasing it, and the value will increase. However, if that news is negative then traders will sell the currency and that will result in the price of the currency decreasing.

When you see spikes on a currency chart, what you are actually seeing is the impact of economic information. The foreign exchange market reacts almost instantly to new information that is released in a country. Opinions are created in seconds and this results in a large number of new purchases or sales within a market. It takes some time for a larger currency movement to take place, depending upon the perception of the market.

It takes time and practice if you want to make accurate trades while using fundamental analysis. If you are trading on the foreign exchange market then there are opportunities available for you to buy or sell currency based upon how other traders are viewing a certain market. However, because the market can make very quick and very radical changes, and because a currency might behave in a very unexpected way, you cannot always be certain that you’re making the right decision. Choppy, wild moves can occur in a market as soon as news is released and is digested by the market. Often times, during those wild moves, inexperienced traders can become tangled up in all the resulting information.

Studying past information can help you effectively use fundamental analysis in order to trade. Practice on trades that aren’t going to result in large losses, or even practice on trades that you have not invested in, attempting to predict market changes without losing any capital. When you have mastered fundamental analysis, at least to the point that you are comfortable using it in most situations and you feel like you have enough practice, then you can start trading normally.