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Fundamental Analysis - Forex
Fundamental analysis is built from the basic idea that the value of
a currency is determined by comparing the strength and weakness of a
country's economy to that of its trading partners. The stronger the
country's economy (which is measured by higher interest rates, lower
inflation, greater productivity, stronger political stability,
higher GDP growth and much more), the stronger its currency. In
time, these fundamental factors create the long term price trends
that are typical of the currency markets.
fundamental analysis, several economic factors are monitored and
assessed. These factors are judged on the effect that they have on
the country's economic growth and development. These trends are
generally quite complicated and are often large. They can be enacted
over a long period of time. The political system is another factor
which can affect the economic status of a country. The balance
between the individual competition and the social welfare, or how
open an economy is to foreign trade and capital, can have a great
impact on the economy. The natural resources, such as mineral
deposits or oil play a part, as well as the cultural and social
makeup of a country, such as entrepreneurship, labor mobility and
Fundamental analysis uses economic statistics to view the economy
and its currency. Rather that looking at the economy as a whole,
these statistics often reflect a particular sector of the economy.
This means that different statistics may actually point in opposite
directions. For example, one portion of the economy may be growing
steadily while another portion is faltering, or one industry is
rising in importance while another is declining. Most statistics are
also retrograde, showing you what has already happened but not
necessarily what is going to happen in the future.
world events (political, military, human and even natural events)
can create large, fast and long-lasting repercussions in our
volatile and interconnected world. When painting the overall picture
of an economy (strengths, weaknesses, vulnerabilities, future
potential and future course of its currency), a fundamental analyst
must take all of this information into consideration. The
fundamental analyst also uses personal experience and judgment to
complete the currency analysis.
Transactions in the Forex market are different from those in a
retail environment. When you make a purchase from a retailer, the
price you pay for the product is predetermined by the seller. As a
purchaser, you measure your need for the item against the asking
price. Using this information, you decide whether to buy or not. In
a Forex market transaction, the buyer and seller are both adjusting
their price expectations continually, based on the information
streaming out from the market to the participants and into the
market from outside sources. A seller who is expecting the price to
be higher in the near future may choose to withdraw an offer in
hopes of getting a higher rate. If enough sellers withdraw their
offers at a specific level, the deal price will rise to the next
available offer. Likewise, if traders believe the price may fall,
they may lower their own offers until they find a buyer, in turn
driving the market price down.
As the market participants
react to the changing information, the combined reaction causes
movement in price. An observer sees the "market" as having traded
lower because the thousands of individual decisions that make up the
movement are viewed as one large mass decision. We often say "the
market took profit today" or "the market reacted badly to the news".
The "market" is a picture of the thoughts of its participants, in
other words, a snapshot of our minds.
Market movement is
produced by the difference between what the participants assume will
happen and what actually happens in the market. When an economic
statement is released and it is the same or similar to the general
opinion of what would happen, the trading reaction is often muted.
The statistic is said to be "priced into the market", meaning that
several prior trading decisions assumed the state of the economy
displayed by the statistic, which was reflected in the trading rate.
On the other hand, if the statement is different than what the
participants assumed, then most of those trading decisions will be
immediately unwound, resulting in price movements that reflect those
changes. It is the tension between the opinion of the majority of
the participants as reflected in the trading rate and the economic,
statistical or rate reality that dominates currency trading.
Economic Indicators 101
An economic indicator is information
amassed and published by a government or private entity recording
the activity in a particular economic sector, either in a specific
industry or in an entire economy. Most indicators are statistical,
but they can be anecdotal or subjective as well. Indicators are
recorded and published on a regular basis by many organizations and
are used by traders to assess the strengths or weaknesses of an
economy, to predict future activity, to judge central bank policy,
and to provide insight into the many economic variables that make up
a modern industrial economy.
Information accumulated and
broadcast by a government or private entity recording the activity
in a particular economic sector (either in the entire economy or in
a specify industry) is an economic indicator. Most indicators are
statistical, but that can also be subjective or anecdotal as well.
Several different organizations register and broadcast economic
indicators on a regular basis. They are used by traders to determine
the strengths and weaknesses of an economy, to judge central bank
policy, to predict future activity and to provide insight to the
many economic variables that establish a modern industrial economy.
Most indicators are classified as either leading or lagging. If
the indicators track economic factors that often change before the
general economy, they are leading indicators. These indicators are
generally used to predict future economic conditions. On the other
hand, lagging indicators record activity that has already occurred
and may or may not prove useful in prediction.
indicators are the broadest measures of productive activity and
record the result for an entire economy. Usually collected by
governments, they are among the most authoritative statistics.
The broadest measure of productive activity are economy-wide
indicators. These indicators record the result for an entire
economy, rather than that of a specific sector or industry.
Economy-wide indicators are usually collected by governments and are
among the most authoritative statistics.
economy-wide indicators are:
Industry and sector based
statistics normally pertain to a particular industry, such as
housing or a particular economic activity, such as retail sales.
Collected by both government agencies and private sector groups, the
activity they track is more limited, and can have a close
correlation to the broader indices, generating considerable trading
- Gross Domestic Product (GDP)
- Consumer Price Index (CPI)
- Producer Price Index (PPI)
- Unemployment Rate
Statistics that generally pertain to a particular
sector, activity or industry, such as retail sales or housing, are
industry and sector based statistics. These statistics are collected
by both private sector groups and government agencies. The activity
that is tracked by these statistics is more limited and can have a
close relationship to the broader indices, which generates a
considerable trading interest.
Examples or industry and
sector based statistics are:
Finally, the indicators
that gauge business and consumer opinions on current economic
conditions and their expectations and intentions for the future are
called sentiment indicators.
- Durable Goods Orders
- Housing Starts
- Building Permits
- New Home Sales
- Retail Saless
- Purchasing Managers Index
- Institute for
Supply Management (ISM) Survey
Not all statistics on a single
topic are of equal importance. Some government and central banks
prefer one measure to another and the markets will assign that much
more trading weight to the favored statistic. Other statistics gain
or lose interest over time depending on their volatility, changes in
the economy or newer and better measurement techniques.
Statistics on single topics vary in importance. Some central banks
and governments prefer one measure to another. Based on that
preference, the markets will assign the greater trading weight to
the favored statistic. Depending on their volatility, changes in the
economy or newer and better measurement techniques, other statistics
will gain or lose interest over time.
Depending on what is
believed to be more relevant to the current market and economic
conditions, traders will also focus on other statistics. For
example, economy-wide statistics will be prevalent when the market
focus is on GDP growth. In contrast, industry-wide statistics will
be the focus of interest when developments in that industry are of