The (Foreign Exchange) Forex Trading Market Explained.
 

 

Introduction to Fundamental Analysis

FOREX trading uses various indicators to determine market moves

FOREX traders almost always rely on analysis to make plan their trading strategies.  There are two basic types of FOREX analysis – technical and fundamental.  This article will look at fundamental analysis and how it used in FOREX trading.

Fundamental analysis refers to political and economic conditions that may affect currency prices.  FOREX traders using fundamental analysis rely on news reports to gather information about unemployment rates, economic policies, inflation, and growth rates.

Fundamental analysis is often used to get an overview of currency movements and to provide a broad picture of economic conditions affecting a specific currency.  Most traders rely on technical analysis for plotting entry and exit points into the market and supplement their findings with fundamental analysis.

Currency prices on the FOREX are affected by the forces of supply and demand, which in turn are affected by economic conditions.  The two most important economic factors affecting supply and demand are interest rates and the strength of the economy.  The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance. 

Indicators

Various indicators are released by government and academic sources.  They are reliable measures of economic health and are followed by all sectors of the investment market.  Indicators are usually released on a monthly basis but some are released weekly.

Two of the most important fundamental indicators are interest rates and international trade.  Other indicators include the Consumer Price Index (CPI), Durable Goods Orders, Producer Price Index (PPI), Purchasing Manager's Index (PMI), and retail sales.

Interest Rates - can have either a strengthening or weakening effect on a particular currency.  On the one hand, high interest rates attract foreign investment which will strengthen the local currency.  On the other hand, stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will adversely affect many companies.  Stock investors may sell off their holdings causing a downturn in the stock market and the national economy. 

Determining which of these two effects will predominate depends on many complex factors, but there is usually a consensus amongst economic observers of how particular interest rate changes will affect the economy and the price of a currency.

International Trade – Trade balance which shows a deficit (more imports than exports) is usually an unfavorable indicator.  Deficit trade balances means that money is flowing out of the country to purchase foreign-made goods and this may have a devaluing effect on the currency.  Usually, however, market expectations dictate whether a deficit trade balance is unfavorable or not.  If a county habitually operates with a deficit trade balance this has already been factored into the price of its currency.  Trade deficits will only affect currency prices when they are more than market expectations.

Other indicators include the CPI – a measurement of the cost of living, and the PPI – a measurement of the cost of producing goods.  The GDP measures the value of all goods and services within a country, while the M2 Money Supply measures the total amount of all currency.

There are 28 major indicators used in the United States.  Indicators have strong effects on financial markets so FOREX traders should be aware of them when preparing strategies.  Up-to-date information is available on many websites and many FOREX brokers supply this information as part of their trading service.   

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Introduction to Online Forex Trading
Current Forex Currency Rates
Forex Trading
How to Get Started In FOREX Trading
FOREX versus Futures Market
FOREX versus Stocks
FOREX Trading Philosophy
FOREX Tools
Fundamental Analysis In Forex Trading
Forex Technical Analysis - Part 1
Forex Technical Analysis - Part 2
FOREX Trading Strategies
Trading Currencies on Margin
Currency Option Marketplace
FOREX Signals
How to Read FOREX Quotes
Calculating FOREX Profits and Losses
Risks of FOREX Trading
FOREX Training
FOREX Trading Software
FOREX Brokers
FOREX Glossary
Forex Updates and Training
Crash Course in Forex Education
How to Recognize Patterns in Forex Trading Markets
Defining Exotic Currencies and Their Impact on Forex Markets
Defining Trading Trend and Ranges in Forex Trading
Mind Games – The Psychology of Forex Market Trading
Crossing Currency - What’s This Mean to Forex Traders
Money Management Basics for Forex Traders
Choosing Your Forex Broker
Expensive Beginner Forex Trader Mistakes
The Elliott Wave Theory for Forex Markets
Failsafe Facts to Guarantee Failure in Forex Trading
Five No Nonsense Strategies in Forex Trading
Global Expansion and It’s Reaches within the Forex Market
Hedging in the Forex Market
The Important Ways to Keep From Losing in the Forex Markets
An Overview of the Euro’s Performance in the Forex Markets
Six Trading Tips for the Forex Newbie
The Lowdown on Day Trading
Interpreting How Interest Rates Drive the Foreign Exchange Markets
The Basics of the Bollinger Band Technical Indicator in Forex Markets
Relative Strength Analysis in Forex Trading
The Basics on Understanding Forex Options
Forex Charts – What Are They and How Do You Read Them
Interpreting the Future of the Oil Marketplace and How It Affects Forex Trading
Top Five Economic Indicators that Drive Forex Trading
Rules for Trading in Forex Markets
How Does the Japanese Yen Stack Up Against the US Dollar in Forex Markets
Pivot Points in Forex
The Ins and Outs of Trying Out a Forex Demo Account
The Top Currencies to Watch in the Forex Trading Game
Defining Moments Regarding Trading Trends and Ranges with Forex
Top Ten Basic Terms in Forex Trading and Their Definitions
Forex Folklore Investment Myths in the Market
Five Economic Driving Forces that Influence Forex Trading
Day Trading All You Wish You Did Not Have to Know
Time line for Daily Forex Trading When are the Optimum Moments
Forex Relative Strength Analysis
How Forex Quotes Can Influence your Trading Tactics
Forex Market RSS Feed
FOREX Links
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