Planning Trades through Fundamental Analysis

In any financial trading--bonds, commodities, currencies, stocks, or other securities–an investor must become proficient at analyzing the market and predicting economic changes that affect security values.

An investor in the foreign exchange has choices in how to analyze financial markets. The two main choices are technical analysis and fundamental analysis.

The first, technical analysis, performs comprehensive studies of value changes in order to speculate on changes in future prices.

Instead of the detail-oriented approach of technical analysis, fundamental analysis provides an overview of a country's economic condition. This method relies on the idea that shifts in a currency's value go hand-in-hand with the desirability of that currency. Likewise, a currency’s desirability is related to the strength or weakness in the economy of its country.

For instance, during times of economic prosperity in Japan, the Japanese yen sees its international worth increase. Traders in the foreign market begin to invest in the yen during these times, and the yen goes even higher in value. It’s a cycle of increasing worth.

Fundamental analysis is, in theory, a simple and clear-cut way to track a country’s economic situation. In reality, however, using the data to predict economic markets is more difficult than it sounds. An investor must take into account several issues when interpreting data. Often, more than one investor will analyze the same data but come to different conclusions.

Investors using fundamental analysis use various indicators in an attempt to discover the strength of a nation’s economy. Some of the most important are gross domestic product (GDP), interest rate, unemployment rate, and the consumer price index.

Various government and non-government agencies periodically release economic reports that any investor utilizing fundamental analysis needs to read. By watching these reports as they are published and keeping track of the shifts in currency values, an investor will begin to recognize trends.

The data reported is not the only factor an investor needs to consider. These numbers are not all that influence the increase and decrease of currency prices. A forex investor needs to take special note of the numbers that are predicted and the ones that actually come to pass.

For example, a rising unemployment rate or a higher interest rate may not affect the value of a currency in the way we may initially expect. However, if financial analysts predict that the interest rate will remain stable and it rises sharply instead, currency values will undoubtedly be influenced in some way.

One disadvantage of using fundamental analysis is that it is sometimes too broad, too much of a ‘big picture’ snapshot. The details this approach supplies are not always sufficient to correctly predict the best choice in forex trading. An investor must find the balance as he tries to find the most successful buying and selling regime.