Forex Fundamental Analysis

If you are new to the market, you may be wondering what type of investing approach is right for you. While the forex has major differences from other exchanges like the NYSE or CME, you still have the choice of two forms of analysis. Technical analysis relies upon charts, indicators and price data, to form a cohesive trading strategy. On the other hand, fundamental analysis focuses upon the underlying financial information which is fundamental to profitability.

Yet, how can you perform forex fundamental analysis, as currencies don't have price to earnings ratios or dividends to study? It is actually quite simple; you just need to examine the overall economic climate, rather than an individual company. To help you in this important endeavor, let's look at this topic in more detail below.

Currency prices move just as stock prices do, but the reasons for their underlying values are different. The main goal of fundamental analysis is to determine the value of a particular investment, separated from the market's opinion about it. For example, oranges may be worth $2 a pound according to your research, but before the yearly crop report is released, there may be speculation. This can cause the price to rise or fall, but this isn't based upon the actual value of a pound of oranges.

However, the premise behind fundamental analysis is that the price will always correct itself. How does this work? In our theoretical scenario, oranges will adjust somewhere down the line, and reach $2 a pound once again. This is based upon their inherent value, and fundamental investors believe that this will always drive the price in the end.

Now that you understand the basic idea behind forex fundamental analysis, it is important to look at some specific factors which you can study. It is worth noting that the best forex trading platforms often have some of these indicators built-in, making it easier to perform your analysis. The forces which move the price of a nation's currency are different than those which drive a stock's price.

It is generally the economic conditions of a country or even the world as a whole, which affect a currency's value. Often reports which include statistics that measure the health of a country's economy are released by the government of the nation in question. Also, many services now offer exhaustive reports as well, to give you easy access to all the data you need in one convenient location.

What indicators are most important? While it is crucial to keep in mind that legislation and government policies can move currency price as well, a few reports are recognized for their value. A key number to keep your eye on when performing forex fundamental analysis is the Gross Domestic Product, since most experts agree this is the best starting point, as it provides a general overview of a nation's economic strength.

How is it calculated? The GDP is a figure which includes the total value of every product and service which a country produced during the calendar year. However, if you are using one of the best forex trading platforms currently available, you may have access to more valuable data. The preliminary GDP figure is important to study, as this is an educated forecast of a country's earnings. Often, once the GDP has been released, the market has already moved in response to this first report. So, it is important to locate the best trading platform which will provide the most recent data, as this will give you an edge on your competition!

The Consumer Price Index or CPI is valuable as well, and it can give you unique insights into the market. This index tracks the price of consumer products, giving you a running indication of a nation's profit. How does this work? When you correlate this data with the export reports, you can determine if a country is making or losing money. Forex trading platforms offer this key indicator as well, as many investors recognize its value.

So, in conclusion, by carefully following these and other economic indicators, you can perform in-depth forex fundamental analysis. The Gross Domestic Product and Consumer Price Index are two of the most important, and the best trading platforms have these included. These will give you an understanding of the underlying value of a currency, and will help you to make wise investment decisions.