Fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. A fundamental trading strategy (often used by online forex traders) is also known as forex fundamental analysis. It is made up of strategic assessments in which a particular currency is traded on the basis of various criteria with the exception of the price action. To these criteria belong current economic conditions in the state that this currency represents and a great deal of other elements essential for the subject. Everything that is fundamental to economies should be regarded as elements of fundamental analysis.
Macroeconomic indicators, such as economic growth rates, inflation, interest rates, level of unemployment and other issues – all that is relevant for a good forex fundamental analysis. Fundamental analysis focuses on the economic, political and social factors that drive supply and demand on the market. Prices of the currencies reflect the balance between supply and demand for certain currencies. Two major factors that affect supply and demand are interest rates and the overall strength of the economy. Various economic indicators reflect the overall health of the given economy. The main problem of forex fundamental analysis is that it does not provide entry and exit points. That is why risk control may seem rather difficult, especially when applying leverage techniques. Huge amounts of information come out at regular intervals and only a part of it is of some importance.
The most closely analyzed data is the one related to interest rates and international trade. When starting a fundamental analysis of any currency pair it is important to know the fundamental elements of the whole economy. They become a crucial part of the analysis. The most well-know fundamentals are presented below. The Basic Concept Various types of financial instruments perform depending on the state of the economy. Inflation (increasing prices) and deflation (decreasing prices) obviously affect the expected returns. So, when performing a fundamental analysis it is important to consider the direction of the whole economy. How? By analyzing its cycle, inflation and deflation. 1. Business cycle – It represents changes in economic activity. It is comprised of four phases: expansion (also called recovery), peak, recession (also call contraction), and trough. In the expansion phase, business activity is growing and accelerating, production and demand are increasing, and employment is expanding. Businesses and consumers normally borrow money to expand, which causes interest rates to rise. Increasing interest rates cause the country’s currency to appreciate. 2. Inflation – When demand exceeds supply, prices raise causing inflation. It happens when the economy is reaching its peak.
More money is spent for fewer items. This in turn reduces the purchasing power of the consumer. When prices increase, people buy less, thus demand declines. The economy enters into the recession phase of the cycle. 3. Deflation – when economic activity slows down and unemployment increases, prices fall causing deflation. The economy enters into the trough phase. After some time, lower prices will spur demand and the economy will enter into the expansion phase. Gross Domestic Product (GDP) One of the most significant measures of economic activity is the Gross Domestic Product (GDP).
GDP is the total value of goods and services produced by the entire economy of each country. GDP is comprised of consumer spending, investments, government spending, and net exports. The simple formula is: GDP = C + I + G + Exports - Imports When Real GDP (GDP adjusted for inflation) declines for two consecutive quarters, the economy is in recession. Indicators of the Business Cycle In economic theory there are three types of indicators that provide monthly data on the movement of the economy as the business cycle enters different phases: leading, coincident, and lagging indicators. The business cycle's effect on Forex markets Forex markets are very sensitive to changes in the economy. When the economy goes through the different cycles, currencies react to these changes. Investors analyze these movements and take action, attempting to take advantage of changes in the economy. Monetary Policy Monetary policy is a tool central banks use to control the supply of money and credit in the economy. Monetary policy includes interest rates thus increasing or decreasing economic activity. The main goal of monetary policy is the control of inflation (increasing prices). The activity of Central Banks Central banks are responsible for implementing monetary policy. Each country’s central bank is responsible for controlling the economy. Banks can use many tools to do so, money supply and changing interest rates are some of them.
United States’ central bank is called the Federal Reserve System. Many people believe it is the most powerful organization in the world. The board has seven members appointed by the President and confirmed by the Senate. More about the Fed and other central banks in the next chapter. Feel free to contact me with any question or comments.
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Macroeconomic indicators, such as economic growth rates, inflation, interest rates, level of unemployment and other issues – all that is relevant for a good forex fundamental analysis. Fundamental analysis focuses on the economic, political and social factors that drive supply and demand on the market. Prices of the currencies reflect the balance between supply and demand for certain currencies. Two major factors that affect supply and demand are interest rates and the overall strength of the economy. Various economic indicators reflect the overall health of the given economy. The main problem of forex fundamental analysis is that it does not provide entry and exit points. That is why risk control may seem rather difficult, especially when applying leverage techniques. Huge amounts of information come out at regular intervals and only a part of it is of some importance.
The most closely analyzed data is the one related to interest rates and international trade. When starting a fundamental analysis of any currency pair it is important to know the fundamental elements of the whole economy. They become a crucial part of the analysis. The most well-know fundamentals are presented below. The Basic Concept Various types of financial instruments perform depending on the state of the economy. Inflation (increasing prices) and deflation (decreasing prices) obviously affect the expected returns. So, when performing a fundamental analysis it is important to consider the direction of the whole economy. How? By analyzing its cycle, inflation and deflation. 1. Business cycle – It represents changes in economic activity. It is comprised of four phases: expansion (also called recovery), peak, recession (also call contraction), and trough. In the expansion phase, business activity is growing and accelerating, production and demand are increasing, and employment is expanding. Businesses and consumers normally borrow money to expand, which causes interest rates to rise. Increasing interest rates cause the country’s currency to appreciate. 2. Inflation – When demand exceeds supply, prices raise causing inflation. It happens when the economy is reaching its peak.
More money is spent for fewer items. This in turn reduces the purchasing power of the consumer. When prices increase, people buy less, thus demand declines. The economy enters into the recession phase of the cycle. 3. Deflation – when economic activity slows down and unemployment increases, prices fall causing deflation. The economy enters into the trough phase. After some time, lower prices will spur demand and the economy will enter into the expansion phase. Gross Domestic Product (GDP) One of the most significant measures of economic activity is the Gross Domestic Product (GDP).
GDP is the total value of goods and services produced by the entire economy of each country. GDP is comprised of consumer spending, investments, government spending, and net exports. The simple formula is: GDP = C + I + G + Exports - Imports When Real GDP (GDP adjusted for inflation) declines for two consecutive quarters, the economy is in recession. Indicators of the Business Cycle In economic theory there are three types of indicators that provide monthly data on the movement of the economy as the business cycle enters different phases: leading, coincident, and lagging indicators. The business cycle's effect on Forex markets Forex markets are very sensitive to changes in the economy. When the economy goes through the different cycles, currencies react to these changes. Investors analyze these movements and take action, attempting to take advantage of changes in the economy. Monetary Policy Monetary policy is a tool central banks use to control the supply of money and credit in the economy. Monetary policy includes interest rates thus increasing or decreasing economic activity. The main goal of monetary policy is the control of inflation (increasing prices). The activity of Central Banks Central banks are responsible for implementing monetary policy. Each country’s central bank is responsible for controlling the economy. Banks can use many tools to do so, money supply and changing interest rates are some of them.
United States’ central bank is called the Federal Reserve System. Many people believe it is the most powerful organization in the world. The board has seven members appointed by the President and confirmed by the Senate. More about the Fed and other central banks in the next chapter. Feel free to contact me with any question or comments.
[SigmaForex Customer Support Area]
Customer satisfaction is number 1
It's a well known fact that no business can exist without satisfied customers, Sigma support you with all your needs that have been chosen according to your demands.
Our slogan is to achieve the maximum level of satisfaction for our customers for that we built customer support which is availble 24/7 to be reached for all clients at any time.
Open Live Chat Now
Email Us
FAQs
Funding Methods
Withdrwal Methods
Trading Agreement
