Analysis is a crucial part of any forex trading system. There are basically two types of analysis: forex fundamental analysis and technical analysis. There is a divergence of opinion as to which is the better of the two, but either way, both have an important part to play in the overall system..
So what is the difference between the two? Fundamental analysis takes into consideration matters pertaining to the world economy, whereas technical analysis tends to analyze charts.
What are the different fundamental or economic factors and how they can affect your trades?
Past experience tells us that a nation’s economic status will have an effect on the value of that nation’s currency. Current economic crisis has demonstrated this perfectly over the last few months. A healthy economy equates to a strong currency, in the same way, when a company is doing well, its stocks will rise in value.
Any major financial or economic event from around the world will have an impact on the foreign exchange markets. This can include anything from statements of the national debt, inflation to employment levels and trade deficits. It is not unusual to see these reports appearing regularly at predetermined times and dates. During these times you can expect to witness a lot of volatility in the forex markets.
Most successful forex traders make sure they are able to keep track of when these reports are due. This applies not only to your own country but also in the countries whose currencies you regularly trade in. National newspapers and television cannot be relied upon to deliver this timely information as they do not have the coverage of international economic news at a sufficiently detailed level. Specialist publications, and in particular the internet can be used for this purpose.
As well as economic events, the social and political situation also has a strong effect on a nation’s currency values. Fluctuations in values can often be caused by events such as an election, civil unrest, or a natural disaster.
It can be difficult if not impossible to predict many of these events; however it is possible to base your trades around a likely outcome. Analysis of previous happenings can help you to find out how the currency markets responded the last time there was an event of a similar type.
If you are the type of person who enjoys following the financial, political and economic news, you will undoubtedly benefit from basing your trading around fundamental analysis of the forex markets
If you are unhappy with the uncertainty of this type of fundamental analysis, then the alternative is to avoid trading at those times, but remember that in order to do that, you need to keep well informed.