The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliché, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.
In the equities market, the Forex Fundamental Analysis (FA) is used to appreciate a currency’s true value by rigorously analyzing the economic, political and social factors that may have an impact on the supply and demand of an asset. In this article you can find out which factors determine the value of a country’s currency and a guide on how you can use this forex trading practice to your advantage.
What indicates the value of a currency?
The value of a currency is determined by the demand and supply of an asset. These two actions can indicate the current price of an asset or where it is heading. The Forex Fundamental Analysis happens when the trader analyzes the economic, political and social aspects of a country in order to understand the way they affect the supply and demand.
This can be extremely challenging, as an enormous amount of data is made public on a daily basis all around the world and using this forex strategy can be time consuming. However, even if it’s complex, the forex fundamental analysis is essential for successful trades and the best way to use it is by creating a plan, structured in a few steps, which must be followed before buying or selling a currency.
How to use the Forex Fundamental Analysis
The forex trader must establish the basis of the analysis and categorize the information into three main sections: economic, political and social. When it comes to the economic aspects, the monetary policies of major central banks are arguably the most important factor.
For example, while trading on the major currency pair USD/AUD, a thorough analysis of the past events and updates given by the Federal Reserve System (central banking system of the USA) and the Reserve Bank of Australia (central banking system of Australia), not only indicates the current value of each currency (USD/AUD), but it will also permit the trader to foresee where they are heading, based on the available statistics.
Apart from the monetary policies, the Gross Domestic Product (GDP), the current unemployment rate, inflation and capital expenditure are equally important for the fundamental analysis. The GDP represents the monetary value of the goods and services produced within a country over a certain period of time. It also includes the Government expenditures on infrastructure, education, health and other sectors. On the other hand, inflation is the rate at which prices rise and the purchasing power falls.
A country with a strong economy will have a high GDP growth, low inflation and unemployment rates and high interest rates. If the economy is strong, the country will have a strong currency as well. Basically, the forex fundamental analysis requires the trader to acknowledge and study all of the available statistics in order to determine the current and future value of a currency.
The political and social aspects must be studied as well, in order for the forex fundamental analysis to bring the aimed results. Big political events, statements given in speeches by important figures and political tensions can have a considerable impact on the currency market moves. Some of the best examples are a few major events that took place in the past two years, like Brexit, the US Presidential elections and the victory of French President, Emmanuel Macron.
These events completely changed the value of their countries’ currencies and left behind historical moves in the stock market. However, major events aren’t the only ones traders should keep an eye on. Equity markets are highly volatile and react immediately to economic and political decisions, even army decisions sometimes. The best way to stay updated is by using an Economic Calendar, which contains dates of significant pre-scheduled events and alerts its users about the latest worldwide news.