Fundamental Analysis As A Trading Strategy
Traders who follow this strategy believe the market is influenced by economic and political events and keep a close eye on the calendar as key dates and speeches are believed to have a significant impact. This compares to technical analysts who base their strategy on patterns of movement seen in the past, placing little or no importance on current and world events.
Although forex trading covers a whole host of currencies from all over the world, the US dollar is one of the major forces in the market and even if you are trading something unrelated, movements in the US have a ripple effect. For this reason, regardless of what currency you opt for, it is essential to keep a close watch on key speeches, data and political events in the US if you are a fundamental trader.
Other than the US, there are several key pieces of data that fundamental analysts believe influence the market significantly:
Interest rates. A rise in rates usually prompts a currency to strengthen, as it will become more attractive to investors due to a greater rate of return. Likewise, a country that drops its interest rates can expect its currency to weaken as investors move their assets to alternative destinations where returns are higher.
Gross Domestic Product (GDP). GDP is the way in which many countries measure the performance of their economy and is reported every three months. An increasing GDP is closely linked to a rise in interest rates, which in turn leads to a strengthening currency.
Trade balance and Treasury budget. Any country that has a constant trade deficit will see its currency weaken due to increased commercial sales of the monetary unit.
Employment figures. Payroll data is seen as another indication of the economic strength and viability of a nation. Decreases in the payroll figures are seen as a sign that the economy is weakening, which could lead to lower interest rates and ultimately a drop in the value of the currency.
Fundamental traders keep an economic calendar that marks the release of data relating to all of the above, as well as regular speeches and forecasts produced by leading bodies and politicians.
Because of the potential impact of the economic calendar, when a major event is due, activity in the forex market can be expected to increase. For this reason, it can be a good idea to try to open a position before the floodgates open. It is also essential to use a guaranteed stop loss to prevent any slippage caused by the volume of traders opening and closing positions.
While forex is all about earning money saving money on losing trades is equally important. Using the above method of trading diligently has the potential to bring great returns but like any financial market, there is significant risk attached. It is therefore imperative to use all the tools at your disposal to make sure any position that doesn`t perform as well as you would have hoped is closed before any losses wipe out your account.