There are several ways to predict price action in the forex market but these can be generally summarized into two main kinds: fundamental and technical analysis. This article will discuss fundamental analysis and how it is used to predict trading movements. In addition, we will discuss the tools that you will be needing and how this can be used to make profits in trading.
Fundamentals or fundamental analysis is all about looking at factors, whether its economic or political, that could influence the price of a currency. In particular, fundamental analysis experts tend to zoom into the economic factors and data that can show if a country is doing well or not. With that, economic releases tend to have a huge impact on forex price movements since these show if the rate of return on the currency will increase or decrease and if demand will climb or fall.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
Applying these kinds of analysis in forex trading is simple if you have a forex calendar. This calendar shows the events that you should expect and the potential impact on the currency pair. It shows if the particular release will result to a strong reaction from the currency involved or it might provide hints for bigger-tier events. For example, the gross domestic product is usually followed by a large reaction in price because it shows if the economy grew or not. On the other hand, smaller-tier reports such as manufacturing production simply give hints on whether the GDP might be strong or not, and thus has limited impact on price movements.
When using fundamental analysis, it also helps to look at the longer-term perspective. This puts the reports being released in the proper context and allows the trader to figure out if the reaction will last for days or if it will reverse later on.
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