How to Do A Proper Fundamental Analysis

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Introduction

Fundamental analysis in Forex Trading is a criterion of measuring the intrinsic value of a particular security; this criterion is done by analyzing all the economic and financial factors related to that security. Concerning Forex trade, in particular, it entails observing the economic conditions that affect the market value of a nation’s currency.

The analysis in question will, therefore, look at the financial markets with the sole aim of price forecasting; the main focus concerning the analysis will be on the overall state of the economy. The details of the analysis include research on various aspects such as interest rates, employment, the Gross Domestic Product, international trade and the impact of these factors on the country’s currency.

Economic Indicators in Fundamental Analysis

Economic Indicators are reports given by a government institution or private organization that details the economic performance of a particular country. These reports give a representation of the criterion by which the economic health of a nation is determined; however numerous factors and policies can also affect a country’s performance in the economic sector.

The released reports stated are usually conducted periodically at scheduled dates, therefore, providing the market with an indication concerning the country’s economy; whether it has improved or made a decline.

1. Interest Rates

The forex market is generally governed by the interest rate; it is among the critical factors that determine the overall perceived value of a country’s currency.

Interest rates tend to attract more investment so the higher it is the higher the country’s currency valuation; this leads to an increase in investment as traders have a high demand for the high currency valuation.

On the other hand the lower the country’s interest rate the lower the country’s currency valuation; this leads to a decrease in the investments as the low currency valuation has a low demand.

2. Housing Data

Housing data can be related to the number of newly built homes and existing home sales over a month in a country. Residential construction is a major stimulant to the economy thus followed by the traders vividly.

Low existing home sales indicate a poor economy of a country while high sales, on the other hand, show a strong economy in that country.

 

3. Employment Indicators

These are indicators that assist in reporting on the rate of unemployment in the country; the calculation of this rate can be gotten from the workforce percentage that has no job, the number of newly created jobs, the average hours worked in a week, and the average earnings in an hour.

This indicator has a great power shift on the market as the economy of the country is run by the workforce thus making the report fundamentally important in the forex market.

4. Trade Balance

This indicator is used to analyze the difference between the imports and exports of products in a country. The level of trade balance in a country greatly helps in revealing the economic strength of a nation. One of the best place to trade is on AxiTrader broker which you can get a fair trading as they have a good regulation, servers and system.

It is practically better to have more exports as it leads to an improvement in the economy and the health of the manufacturing sector of that particular country.

 

5. Consumer Price Index (CPI)

This indicator analyzes the price change of consumer products across more than 200 different categories. The report generated is compared to the country’s export and can thus help determine if the country is incurring revenue or making losses on its products.

It is advisable to analyze the exports as the prices on export products frequently change with the strength or weakness of the currency in use. An important application is also in the determination of a country’s inflation in which the Consumer Price Index plays a very important role.

 

6. Producer Price Index

Producer Price Index is also used in alliance with the Consumer Price Index in determining the inflation of a country. This indicator analyzes the price of products at the wholesale phase; it thus analyzes how much income producers are getting for the products. Another indicator you can use is Harmonic Scanner indicators to define the right price reversal point.

 

7. Industrial Production

Industrial Production is an indicator that reveals a change in the production process in factories, mines and other utilities within the borders of a nation. It is also used to analyze the capacity utilization in the industry; the degree to which the capacity of each industry is being utilized. Conceptually, a country is expected to observe an increase in production when it is at a maximum stage or is nearing that maximum stage of utilization.

Investors using this indicator usually concern themselves with the utility production as it is very volatile; this is because the utility industry and the energy trade is extremely affected by the climatic changes of the area.

Significant revisions between reports caused by climate changes can result in volatility in the currency of that particular country.

8. Gross Domestic Product

This indicator is regarded as the intricate criterion used in analyzing the economy of a nation; it represents the total market valuation of all the products that are produced in a country in a particular year. This measure is exclusive of any international business conducted by the country; the main focus relies on the business done within the borders of that country.

The Gross Domestic Product is usually considered as a lagging indicator; this means it only changes after the economy has started to follow a particular trend. This, therefore, requires the forex traders to analyze two reports that are released a few months before the release of the GDP; they are the preliminary report and the advance report.

Significant revisions between reports can cause volatility in the currency of that particular country.

9. The Retail Sales Index

The retail sales index analyzes the total sales, through the receipts, of all retail shops located within a country; this analysis is gotten from a sample containing diverse retail shops all around the country.

This indicator is particularly useful in deducing the spending patterns of consumers which can be adjusted for seasonal variables. It can also be applied in predicting the performance of important lagging indicators thus assessing the immediate trend of the economy.

Significant revisions between reports can cause volatility in the currency of that particular country.

Conclusions 

As observed in the article, economic indicators are used to analyze the economic state of a country; therefore any changes from these indicators directly affect the price and volume of a country’s currency.

It is thus advisable to keep a calendar detailing the dates with which these reports from the indicators will be released. Keep most of the concentration on economic indicators that capture most of the market sector’s attention; these indicators catalyze the largest price and volume shift trends in the market.

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