Discover the Basics of Fundamental Analysis in Forex Trading

Forex Fundamental Analysis

Malaysia has a growing army of Forex traders. They buy and sell currencies in the largest global market. With a live trading account, you can monetize foresight. One of the approaches to prediction is Fundamental Analysis.

According to investopedia.com, it is the ‘central pillar of investing’. Many investors, including institutions, take it seriously. Here is why you should be taking fundamental analysis seriously as well.

Basics of Fundamental Analysis

The Fundamentals help you identify the causes of price movements, and make predictions based on available data. Why is your currency pair appreciating/depreciating, and where is it likely to move next?

This makes the method universally applicable to any scope: long-term, mid-term, and short-term. The difficulty, however, lies in the need to consider multiple factors. Many traders find this daunting.

In reality, critics are mistaken. Use of the Fundamentals does not have to be a quest. If you know what you're looking for, the search is much easier.

Importance of Fundamental Factors

Basic economics says that prices move based on supply and demand. Fundamental Analysis focuses on factors affecting values of Major, Minor, and Exotic currencies. A trader well-versed in this approach has an edge over rivals who only use price charts.

Why Does It Work?

The more of a currency is in circulation — the lower its price, as supply is high. On the other hand, a growing demand causes appreciation. Relevant Fundamentals will show you when supply and demand for your instrument change. This is something a price chart won’t tell you. It can show the result, not the causes which are building up.

Another important benefit relates to emotional control. Feelings are every trader’s enemy. All too often, failed trades result from fear or excitement. If you know why prices move, you can evaluate whether a trend will persist. Reliable brokers like ForexTime allow traders to monetize this knowledge. This is one of the keys to successful Forex investment in Malaysia.

The Top Five Fundamental Currency Drivers

Here are the strongest factors that move the currency market.

1. Decisions by Central Banks

The central bank is the heart of any national finance system. This organization monitors commercial banks and lends funds to them. It also determines how much currency is in circulation. The supply is within its control.

These banks manage inflation and interest rates. For example, a high-interest rate for foreign investment attracts more capital. When commercial banks pay higher interest for borrowing, they charge higher interest on personal loans and mortgages.

Decisions concerning the currency rate may cause volatility in the Forex market. Forex traders should keep an eye on the interest rates, as they are the main tool of central banks.

2. Economic News Releases

Every day, there is a barrage of economic news. The term may thus seem too broad. What exactly should you zoom in on? Here are some key aspects:

●       GDP (Gross Domestic Product)

●       CPI (Consumer Price Index)

●       Employment Data (unemployment rate, average earnings, NFP, etc.)

Important economic events influence the currency exchange rates. The effects are based on expectations. The market always has a certain sentiment. Its participants make predictions about economic data. The foreign exchange reacts when the reality is at odds with the forecasts.

3. Geopolitical Events

Geopolitics is a salient factor. For example, a military conflict in a country may send its currency into freefall. Investors prefer countries with stable economic and political systems.

Another relevant factor is the government's fiscal policy. For example, lower corporate taxes result in more vigorous economic development. This makes the economy stronger and more attractive to investors. Eventually, the currency rises.

4. Natural Disasters

Calamities are important because they may affect a country’s economy. A weaker economy means a weaker currency.

5. Intermarket Movements

Financial markets are interconnected. Aside from currencies, there are stocks, bonds, commodities, etc. Different classes of assets affect one another. For example, in times of crisis, many investors look for safe havens, such as government bonds or the Swiss Franc.

 

Why Fundamentals Aren’t That Popular

First, there is the flawed Dow theory that many educators promote. It states that price charts reflect all the underlying economics, being the ‘sum knowledge of all investors’. Therefore, they are presented as the only basis for trading decisions.

Rookies are manipulated into thinking that fundamentals are useless. The idea of some robot doing the job for you is so much more attractive. You are promised that EAs and technical indicators will tell you when and how to trade. 

In most cases, we have marketers to blame. Technical indicators are advertised as a route to quick riches. Many people want to believe that trading can be easy. The reality, however, is different. Not everything is immediately priced in the markets.