If you are new to trading, you should know that technical analysis and fundamental analysis are the two bases for making decisions in the currency market. If the former relies on historical statistics to predict the future evolution of a price, the latter takes into account everything else to achieve this goal. This article details fundamental analysis in forex and how to use it to win in trading. You will also find tips on using the economic calendar.
Trading the News: What is Fundamental Forex Analysis?
In forex trading, fundamental analysis relies on current economic information to make decisions. Just like using the financial statements of a publicly traded company to determine the direction of its fair-priced shares, this method analyzes this information in order to measure a nation’s economic performance and predict whether or not it will be overvalued by a currency. This suggests the possible orientation of the markets after the publication of the economic news.
Economic information can be the monetary policies of central banks, economic press releases or even geopolitical tensions that can influence the evolution of prices. They can be weekly, monthly or yearly. For long-term analysis. It will be necessary to take advantage of major economic trends or central bank rate announcements in particular, while we will mainly use the forex economic calendar for short-term analysis.
The economic calendar, the essential tool for exchanging economic news
In general, it is not easy for forex traders to be on the lookout for all relevant information about a particular currency. However, it would be useless to rely on the media, as this published data may be subject to automatic updates. What is needed is an efficient means of delivering this relevant economic information in real time. And just beyond that, the economic calendar also informs the trader of these key events that will soon be the subject of publication.
Made available to forex investors by numerous brokers and information sites, the economic calendar allows you to assess the level of relevance of the information and indicators involved in deciding to buy, sell or hold the currency. Finally, you can configure this tool to be informed only of the desired information (concerning the EUR / USD pair, the euro or the Japanese yen for example).
To this end, the most important economic news that we recommend to look closely in forex is (these are American economic indicators, because the dollar is present in all major pairs):
- The gross domestic product (GDP) that provides information on the country’s economic health. It is published quarterly by the Ministry of Commerce;
- Industrial production which indicates the total value of the production of manufacturing industries. It is published monthly by the Federal Reserve;
- Inflation, which refers to the change in the general price level in the economy. The key indicators are the wholesale price index (GPI), the consumer price index (CPI) and the producer price index (PPI);
- Employment data including NFP, ADP and weekly enrollments. They are published monthly by the Ministry of Labor;
- Retail sales that provide information on the economic health of consumers. This report is published monthly by the Ministry of Commerce.
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Basically, how to trade with fundamental analysis?
Before starting this section, let’s assume you have an accredited trading account with an online forex broker. So, you should know that a lot of more or less relevant economic information is published daily, with hours known in advance.
First, it will be a question of interpreting the components of the economic calendar which are: the relevance of the statistics, the country concerned, the previous data and the consensus. This last piece of information, which reflects the expectations of economists and analysts, is the most important and will allow us to determine the impacts of the economic news published:
- When the consensus falls below the announced figures, the currency in question should go up;
- When the consensus is higher than the announced figures, the currency in question is expected to decline.
Now, to trade the news, it will be a question of using the above interpretation to make decisions on the markets. In the first case, you can take an upward or downward position, before the publication of the statistic, making your own prediction on the result. Otherwise, you can position yourself immediately after the announcement following the movement of the price (you will have to plan the stop losses). Finally, if you have open positions on the relevant currency, you can choose to close them before the statistics are published. This avoids the possible negative effects of this period of high volatility and uncertainty. This is also why economic calendar monitoring is also important for traders using chart analysis.
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