Most Forex traders are quite familiar with analytical tools for technical analysis. Many of these technical analysis tools like charting packages are integrated with Forex trading software. Another type of analysis used in Forex Trading is equally as important as technical analysis but sometimes it is overlooked. Fundamental analysis should play an equal or even sometimes a more important role in Forex trading analysis.
Traders may be familiar with fundamental analysis and how it is used in in stock market trading. Fundamental analysis and Forex Trading is quite different. In stock trading, fundamental analysis is used to look at the condition of a company and or the industry that it is in. In Forex trading, when we are analyzing a particular currency pair this is not related to a company but rather to the countries that represent the respective currencies. Therefore the economic data all the particular countries in the pair are what our looked at from a fund and fundamental analysis.
In fundamental analysis in Forex a variety of data points are look at. One of the most important is that of the interest-rate data from the different countries. Changes in the interest rates in the different countries can dramatically impact the movement of a particular currency pair. That is why many traders anticipate and are looking to trade on days that interest-rate decisions are made. The United States and the European Union are two places where interest rates are closely followed by Forex traders.
Traders that are using fundamental analysis are constantly looking at the economic calendar and schedule of announcements and will trade based on the data as it is released.
Similar to stock market trading countries’ economies are constantly changing and this is why fundamental analysis is such a crucial tool in Forex Trading.
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Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary.
