There are several ways to predict price action in the forex market but these can be generally summarized into two main kinds: fundamental and technical analysis. This article will discuss fundamental analysis and how it is used to predict trading movements. In addition, we will discuss the tools that you will be needing and how this can be used to make profits in trading.
Fundamentals or fundamental analysis is all about looking at factors, whether its economic or political, that could influence the price of a currency. In particular, fundamental analysis experts tend to zoom into the economic factors and data that can show if a country is doing well or not. With that, economic releases tend to have a huge impact on forex price movements since these show if the rate of return on the currency will increase or decrease and if demand will climb or fall.
Most traders limit their analysis or reports watch list to top-tier releases. For instance, the GDP (gross domestic product) and CPI (consumer price inflation) tend to result to larger price action because they offer a more comprehensive snapshot of how the economy fared. In addition, forex traders also watch out for central bank monetary policy decisions since these have a say in interest rates and the level of liquidity. As such, they impact the rate of return and demand. A central bank that hikes interest rates sees currency appreciation because higher rates means higher demand and price. Conversely, a central bank that cuts interest rates sees currency depreciation because lower rates means lower demand and price.
To apply these things in forex trading, you should have a forex calendar ready. This lists down the major and minor economic events that could lead to a strong price reaction or could provide clues for larger events. For instance, the GDP release tends to have a huge impact on price action as it directly shows whether the economy expanded or not. The manufacturing production reports tend to have a subdued effect since these simply hint at whether the GDP will come in strong or weak later on.
At the end of the day, you also have to consider the long-term perspective in using fundamental analysis. This helps you gauge how long the reaction to the report will last and if it supports the general sentiment for the currency you are trading.
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