Traders in the forex market use two types of analysis in their trading, fundamental forex analysis and technical analysis. Technical analysis seems to be the method of choice for most traders especially since it can be used to trade effectively on smaller time frames, but traders shouldn’t underestimate the value that fundamental analysis could bring to their trading. As in the stock market, forex fundamental analysis involves looking at the intrinsic value of a investment, but countries are not like companies in that they do not have balance sheets and income statements. So, in order to determine the value of a countries currency traders have to look at the economic conditions in the country that have an affect on the valuation of its currency. In this post we are going to take a look at some of these fundamental analysis factors.
The Economic Indicators
Economic indicators are reports that are released by the government or a private organization and they form the core of fundamental forex trading. These reports are similar to the financial statements that publicly traded companies are required to file with the SEC. These reports are released at a scheduled time and since they are the only formal way to measure the strength or lack thereof of national economies if there deviate from the norm then they can cause huge swings in the value of a currency. What follows is a list of the major economic indicators used in fundamental forex analysis.
Gross Domestic Product
GDP is designed to give a broad view of the strength of a economy and represents the total market value of all goods and services produced in a country during a given year. A positive GDP means that the economy as a whole has grown in size, which is good for the currency while a negative GDP means that the economy has contracted which may signal further economic issues.
Retail-Sales
The retail-sales report is a measurement of the total receipts of all retail stores in a given country. This measurement is gathered through a diverse sampling of a nations retail establishments. This report is important because it tells traders whether or not consumers are out spending money in the economy. High retail sales indicate a active economy which bodes well for the strength of the economy as a whole and also it’s currency.
Industrial Production
This report measures the overall change in the production of factories, mines, and utilities within a nation. It also reports how closely these factories are to operating at full capacity. If the factories of a nation are operating at or near full capacity and there is also an increase in overall production then that is a sign for future economic strength.
Consumer Price Index
The CPI measures the change in the price of consumer goods. This measurement is done across 200 categories of consumer goods. When compared to exports it can be an indicator of whether or not the country is making or losing money on its products and services.
Using These Indicators
These forex fundamental analysis factors are meant to be used as a guide to the strength of an economy and by extension the potential its currency has for appreciation. These reports are a good place to start if you are trying to get a grip on fundamental forex trading. However, there are a number of other factors that play also play a role in the valuation of a currency so don’t go opening trades any trades simple because a nations GDP has risen. This post is meant to give you a quick overview of fundamental analysis in the forex market and to give you another lens through which to view your trades.
