Forex Trading – Learning the “Fundamentals”

Forex trading is really a complicated business. Forex traders should consider (among other things) what is known as the “fundamental” elements of a country’s overall economy (i.e. the qualitative elements) that could have a bearing on a country’s currency exchange rate).

So what exactly all these “Fundamental” elements are?

 They consist of political positions and developments (such as modifications to a country’s government financial policy) and relevant decisions made by a country’s central bank. In addition, they consist of any related pieces of economic reports influencing the country in question. Traders should not just have knowledge of these details, but they should be able to predict successfully how currency markets will behave to that. It could most likely be foolish for traders (even those with significant market experience) to overlook all these fundamental factors and simply base their own market choices only on technical analyses.

The critical indicators that a trader should look at when conducting a fundamental analysis of a country’s current economic climate consist of the country’s GDP, employment rate, trade balance,   central bank interest rate and the most recent spending budget. A lot of this information is usually freely available on the web.

The outcome of a fundamental analysis can influence a trader’s strategy in quite a few ways. For example, a trader could use fundamental analysis to figure out or forecast the direction and level to which a given country’s official interest rate could change. Dependent on this analysis, the investor could sell the country’s currency (if he/she forecasts that interest rates will fall), or buy the country’s currency (if he/she forecasts that interest rates will rise). In fact, big investors could take this process one-step further simply by seeking to affect the value of a country’s currency. For instance, such investors could fund industrial development in a state (when that country’s currency is weak) and hereafter sell back that country’s currency at a higher rate (when the currency is strong).

In a general impression, if an Fx investor knows the way to execute a fundamental economic analysis, she/he is going to be in a better position to recognize when to get out of an «over inflated «economy just before its economic» bubble burst.