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chapter 3: Fundamental Analysis

Introduction

There are basically two ways to approach the markets: technical and fundamental analysis.

Technical Analysis: studies the past behavior of price of any given instrument as an attempt to forecast its future behavior.

Fundamental Analysis: the focus of which is to study the economic, social and political forces that drive the supply and demand of currencies. Which one is the best approach?
There has been an ongoing debate on deciding that which approach is better. The truth is, there is no clear answer to this question. One would say that the answer lies within each one of us. That is, one may use the one that works better for one.

If you are a short term trader, you will probably prefer the technical approach, since it concentrates on price behavior. On the other hand, fundamental changes take longer to be visible in the charts so it will be better to adopt a fundamental approach.

Today, many traders and investors use both approaches, so they can have a clearer picture of any given situation.

In this lesson we will go through Fundamental Analysis. The topics covered in this lesson are:

Section 1: What Moves the Forex Market: We will try to explain what makes currency pairs fluctuate; we will see several theories about how currency pairs are valued.

Section 2: Fundamentals by Country: A list of the important news announcements for each country (majors), how important they are to the market, Effects they have on some currency pairs etc. Section 3: Other Economic Indicators: In this section we will review other (not so important) economic indicators that under some circumstances can have a larger than usual impact on the Forex market.

Section 4: Other Fundamental Factors that Influence the FX Market: We will explain the role of political and social crisis, and the statements of important people in the FX Market.

Section 5: Gold and Oil and their Relationship with the Forex Market: Getting to know how each of these two commodities are related to the Forex market can help you make better decisions.

Section 6: Common Practices Used by Fundamentalists: We will mention some practices used fairly often by fundamental traders.

Section 7: Some Thought on News and Event Trading: “Trading the news” has become a very popular style of trading in the last few years; we will analyze its advantages and disadvantages.

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