The Basics of Fundamental Analysis
As we have mentioned several times in the past, there are a few pillars of success when it comes to trading forex successfully. We’ve talked about technical analysis in a few previous articles and now we want to focus on the basics of fundamental analysis, in order to make you understand better why it is such an important factor for your success in forex trading.
The goal of fundamental analysis
Fundamental analysis basically means understanding what’s behind the price actions and the economic reason that leads to traders buying and selling currencies. Fundamental analysis focuses on the core of the intrinsic value of a particular asset, in our case currency, and tries to understand how those economic indicators can influence the future development of the price.
What retail traders, and especially beginning retail traders do not manage to understand is that forex trading is a business and it takes time to master. You can’t just search all day long for strategies or systems that can make you easy pips. You need to develop your own trading method that fits your personality and schedule. You also need to incorporate in this strategy all the necessary tools that can help you achieve success.
Fundamental analysis is one of those tools and in order to use it correctly, you need to have an in-depth understanding of it.
Focus on the important indicators
If we talk about fundamental analysis, there is a huge number of indicators that we could take into account. However, there are just a few indicators that are the most important.
After the crash of 2007-2008, the focus had been on the job market. Unemployment rate and Nonfarm Payrolls for the United States, are some of the indicators that generate the highest volatility.
Also, inflation had been a concern over the last few years. Central banks had found it hard to push inflation towards their goal of below but close to 2 %. Any unexpected change in inflation figures could also weigh hard on the development of the currency, since that could make the central bank change its monetary policy, in particular the interest rate.