Easy To Follow Introduction to Fundamental Analysis For The Novice Forex Trader - By: Don Saunders

It is often held that the key to successful Forex trading is information but, though accurate and timely information is indeed central to currency trading, it is the examination of this information that is the real secret. There are two main types of analysis used in currency trading � fundamental analysis and technical analysis - and in this brief article we examine precisely what is meant by fundamental analysis.

In its simplest form, fundamental analysis examines both political and economic conditions that could affect currency prices and Forex traders who make use of fundamental analysis rely on news reports for information on a whole range of things including economic policy, inflation, growth rates and rates of unemployment.

Basically, fundamental analysis provides an outline of currency movements and a broad picture of economic conditions that could well alter the value of a particular currency. With this picture in mind, foreign currency traders will then frequently move on to make use of technical analysis to then plot entry and exit points in the market and to add to the information gained using fundamental analysis.

The foreign exchange market is very much like other markets and is affected by the laws of supply and demand, which are themselves affected by economic conditions. Two economic factors affecting supply and demand are the strength of the economy and interest rates and the strength of the economy is itself affected by foreign investment, the gross domestic product (GDP) and the economy's balance of trade.

Various economic indicators are released by governments and other sources and are usually held to be reliable measures of economic health that are followed by all sectors of the investment market. Most economic indicators are released monthly but a few are released more frequently and generally weekly.

Two of the key fundamental indicators are interest rates and international trade figures, but other particularly helpful indicators include the purchasing manager's index (PMI), consumer price index (CPI), durable goods orders, producer price index (PPI) and retail sales.

Interest rates are a very important indictor as they can have either a weakening or strengthening affect on a currency. High interest rates could, for instance, attract foreign investment which strengthens the local currency, while stock market investors frequently react to rising interest rates by selling because of a belief that the higher cost of borrowing will have a harmful affect on many companies. Large-scale selling by stock market investors can often lead to a downturn in both the stock market and the economy.

International trade indicators are also especially important to the foreign exchange trader. A trade deficit, showing that exports levels are below those for imports, is generally seen to be an adverse indicator as money leaving the country to purchase foreign goods may well have a devaluing affect on the currency. However, fundamental analysis will also provide an indication of the expectations of the market and these will frequently dictate whether or not a trade deficit is unfavorable. It may be the case, for instance, that a county usually operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. Generally, a trade deficit will only affect currency prices where they are above the level that the market would usually expect.

Each country will have its own set of economic indicators (there are presently some 28 major indicators in use within the United States) and these have a strong influence on financial markets. For this reason, Forex traders must be aware of them and study them carefully when they are preparing their trading strategies.

Fortunately, for traders who are working online, many websites now carry a wealth of the latest information, but it is up to individual foreign exchange traders to take this information and then apply fundamental analysis to it before they make their trading decisions.

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