Understanding Fundamental Analysis

[ForexArticles]

Fundamental analysis is used in the equities market in order to gauge the true value and to make investments based off of this calculation. Fundamental analysis is also used in the forex market. However, in the forex market, traders generally evaluate currencies and their respective countries in order to decide whether an investment is worth it. Economic announcements made in any country often have a direct impact on the true value of a currency, which is why fundamental analysis is used.

How Does It Work?
A prudent trader generally factors in a variety of different news reports, economic announcements and international factors in every single one of their trade. Political events, economic announcements and other news often leave a very strong impact on certain currencies. Therefore, calculating the true value of a currency is not easy. Obviously, it should be known that the values tend to change with the passage of time. For instance, factors such as economic growth and the financial strength of the company both have a major impact on the true value of a currency.

A trader who follows the fundamental trading strategy will consider these factors when planning his/her approach. However, you should know that there are practically unlimited forex fundamental strategies that are used in the market today. Extrapolating the concept of a fundamental analysis directly on to the forex market is not easy.

Many of the factors and indicators that fundamental analysts use in the stock market are non-existen in the forex market. Moreover, you are not trading stocks with one another: you are trading economies. In every single economy that you trade, there are hundreds of companies trying their best to maximize their profit potential. Therefore, analyzing the statistics of a single company doesn’t provide much insight in to whether an economy is faring well or not.

Why Do Currency Values Matter?
The number one reason why currency values matter is because of cross border trading. For instance, if the yen becomes stronger, Japan’s export industry will collapse as countries will stop buying in bulk amounts. The whole concept of fundamental analysis in the forex market boils down to one thing: interest rates. If interest rates rise up, investors often pull out their money from the economy and start saving them up. Movement in the interest rates is the main tool used by Central Banks in order to make movements in their respective economies.

If the interest rates increase, the incentive to spend decreases considerably. This means that there’s lesser money in the economy, which has an adverse impact on the economy, and thus the currency. Understanding fundamental analysis is important if you want to become a sound trader. Not only will it help you maximize your trading strategy, but it will allow you to generate more profits in the long run. Therefore, the biggest indicator that many fundamental analysts use in order to determine true currency values is the interest rate. If the rate of interest is high, the currency value is likely to fall soon.