Fundamental Analysis Of This Factor Is One Of The More Important

Traders in the Forex market generally rely on two basic forms of evaluation which are used to study the markets and predict price movement: fundamental and technical analysis. The idea of this" Big Picture" approach is that the strength of a nations's economy will affect the supply and demand for its currency, which will in turn affect the price of the currency.

Fundamental analysis is essentially the study of a nation's overall economy. On the other side of the" fence" is technical analysis where the currency price is assumed to reflect all news and fundamental factors, and the charts are the objects of analysis. This article will present some general discussion of both areas of analysis and summarize some of the more popular indicators used to predict currency movements. The core belief here is that prices tend to follow patterns and by analyzing past price patterns a trader can predict the future direction of the price. First of all, employing fundamental analysis strategies requires a basic understanding of supply. and demand, which is the most elemental force behind all financial markets. Several factors can have a strong influence on rates. Since the value of a currency comes from the economic health of its respective country, macroeconomic changes can have a significant impact on currency rates.

Some of the more significant are: politics, speculation, economic strength, economic projections, capital movement, inflation rates, interest rates, and quotas and tariffs. A country's capital flows are the net quantity of currency being traded through various investments: capital, fixed income market, equity market, etc. Fundamental analysis itself can be broken down into two broad subcategories: capital flows and trade flows. Trade flows measure the net of imports and exports of a particular country, and the resulting effects that such flows can have on a nation's currency. A Country which has a positive trade flow( more exports than imports) runs surpluses that serve to increase their currency while the opposite is true for the net importer. The reason that trade plays such a strong role in determining strength of a currency is that importers. are required to sell currency used to purchase goods and services which are exported.

Fundamental analysis of this factor is one of the more important. Some of the more significant indicators include: The Gross Domestic Product( represents the total market value of all goods and services produced) , Retail Sales( measures the total receipts of all retail stores) , Industrial Production( shows the change in production of factories, mines and utilities) , and Consumer's Price Index( measure of the change in prices of consumer goods) . Traders who perform Fundamental analysis study various economic indicators to evaluate economic strength. Although there are other significant indicators that may be monitored, these are the most common and provide a basic analysis of a country's economic strength and hence currency stability. A trader who utilizes fundamental analysis typically will have the report schedules on hand and closely monitor the reports as well as the effects they may have on currency prices. These reports are released on a regular basis by various government agencies and non- government organizations.

Following this for a period of time will help the trader determine better what impact on the currency prices each of the reports may provide. Candlestick Charts are widely used by Forex traders. Technical analysts quite often will use price charts and patterns to anticipate price changes in both direction and range. Consisting of a rectangle that indicates the opening. and closing prices( "candle" ) and the" wicks" that represent the highs and the lows, Candlestick charts allow the trader to find out a great deal about the market and to make effective decisions. Some of the more popular indicators are the following: MACD( Moving Average Convergence Divergence) consists of two moving averages. When conducting Technical analysis of the Forex Market, most traders utilize one or more technical indicators to evaluate market direction and strength. When one moving average crosses over the other one, a change of trend for that currency may be expected.

The two may be used together to confirm a trend change. Stochastics operates much the same way as the MACD. Relative Strength Indicator( RSI) provides information on whether the currency is overbought or oversold as well as whether it is likely in an uptrend or downtrend. Consisting of three lines( the middle line is a moving average) , this indicator can provide useful information on market volatility. Bollinger Bands are somewhat unique. Fibonacci evaluation can provide a retracement projection. Bond Spreads may also be useful as a LEADING indicator.

Unlike most other indicators, the Fibonacci analysis is a LEADING indicator yielding a determination of future market direction, not past. A bond spread is typically viewed on the difference between the five year and ten year bonds of two currencies. While both Fundamental and Technical analysis of the Forex market provide very useful information, they each. have their strengths and weaknesses. The limitation of using Bond spreads as an indicator is it may take several months, even over a year for the anticipated currency change to actually take place. The" Big Picture" of Fundamental analysis is good at identifying general long- term trends in price movement, but it does not give enough detail to provide entry and exit points for a trader. Combining both Fundamental and Technical analysis of the Forex market may give the Forex Trader the best balance in his trading plan.

Technical analysis on the other hand is typically more effective in predicting short- term trends( under three months) ,but it can suffer by being" blind sided" by significant price swings brought about by one or more fundamental factors. By monitoring various indicators on both sides of the" fence" over time, the trader may gain a better understanding of what will work best for his particular trading plan and style.