Fundamental analysis


    Fundamental analysis involves studying the economics of a country or a company to determine the effect this has on its value and price.

    Fundamental analysis is sometimes seen as the opposite of technical analysis. But in fact, an understanding of the one is helpful even for trading strategies that are heavily based on the other.

    Some examples of economic indicators include inflationGDP growthinterest rateshouse pricesexports or the unemployment rate.

    Fundamental analysis in forex trading

    While our forex beginner strategy is the trend-following concept in technical analysis, we think that forex traders need a solid understanding of the fundamentals that influence the currency markets:

    Important fundamental economic indicators are released as reports and currency traders will pay attention to:

    • The actual results
    • The difference between the expected results and the actual results
    • The difference between the most recent previous results and the actual results

    When these indicators are released, the effects on the currency will depend on whether the reports are presenting a positive outlook or a negative outlook for an economy. A positive outlook will likely result in the domestic currency gaining strength against other currencies. A negative report is likely to result in the domestic currency losing strength against other currencies.

    Markets react to news

    There are instances when key financial authorities give speeches regarding decisions that will have an effect on the economy. The actual content of the speech is scrutinised by traders because it can have a substantial impact on the value of a currency. Examples of policy announcements that could affect currency value include changes to VAT or duties, or setting targets to cut unemployment or build more houses.

    The underlying principle is that strong economic results will attract investment because a strong economy is likely to produce good investment returns. When investors decide to invest capital into an economy, they have to do this in the domestic currency. The demand for the domestic currency increases and therefore its value increases.