In the equities market, fundamental analysis looks to measure a company's true value and to base investments upon this type of calculation. This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. If the balance of trade shows a surplus or declining deficit, then there may be an increased demand for the currency. Fundamentally, if a country or currency region raises its interest rates and has strong monetary policy, the currency of that country will strengthen. However, if short-term interest rates rise and the lending rate jumps to 6 percent, your 5 percent return is no longer so attractive, and there are probably other options that could generate more income for your investment.
In the equities market, fundamental analysis looks to measure a company's true value and to base investments upon this type of calculation. To some extent, the same is done in the retail forex.
Forex Fundamental Analysis
But with leverage, you can greatly increase the return. However this strategy only works if the currency pair's value remains unchanged or appreciates. Therefore, most forex carry traders look not only to earn the interest rate differential, but also capital appreciation.
While we've greatly simplified this transaction, the key thing to remember here is that a small difference in interest rates can result in huge gains when leverage is applied. Most currency brokers require a minimum margin to earn interest for carry trades.
However, this transaction is complicated by changes to the exchange rate between the two countries. If the lower-yielding currency appreciates against the higher-yielding currency, the gain earned between the two yields could be eliminated. The major reason that this can happen is that the risks of the higher-yielding currency are too much for investors, so they choose to invest in the lower-yielding, safer currency.
Because carry trades are longer term in nature, they are susceptible to a variety of changes over time, such as rising rates in the lower-yielding currency, which attracts more investors and can lead to currency appreciation, diminishing the returns of the carry trade. This makes the future direction of the currency pair just as important as the interest rate differential itself.
To clarify this further, imagine that the interest rate in the U. Assuming no currency changes, the 25, rubles grows to 27, and, if converted back to U. However, imagine that there was another crisis in Russia, such as the one that was seen in when the Russian government defaulted on its debt and there was large currency devaluation in Russia as market participants sold off their Russian currency positions.
Another good example of forex fundamental analysis is based on commodity prices. You should now have an idea of some of the basic economic and fundamental ideas that underlie the forex and impact the movement of currencies. The most important thing that should be taken away from this section is that currencies and countries, like companies, are constantly changing in value based on fundamental factors such as economic growth and interest rates.
You should also, based on the economic theories mentioned above, have an idea how certain economic factors impact a country's currency. We will now move on to technical analysis , the other school of analysis that can be used to pick trades in the forex market. Introduction to Currency Trading Forex Tutorial: If you trade well before the release, you can try to take advantage of the flow toward the consensus expectation, but other fundamental events around the world can impact the market more than the consensus read.
Trading moments before the economic release means that you have an opinion on whether the actual release will be better or worse than the consensus, but you could be dreadfully wrong and risk large losses on essentially a coin flip.
Trading moments after the economic release means that you will be trying to establish a position in a low-volume market which presents the challenge of getting your desired price. These tensions or conflicts can have an adverse impact on tradable goods by changing the supply or even the demand for certain products.
For instance, increased conflict in the Middle East can put a strain on the supply of oil which then makes the price increase. Being able to properly predict how these events will conclude may be a way to get ahead of the market with your fundamental perspective. There are a variety of weather-related events that can cause prices to fluctuate.
The easiest example is the propensity for winter to create massive snow storms that can drive up the cost of natural gas, which is used to heat homes. However, there are a variety of other weather situations that can change the value of tradable goods such as hurricanes, droughts, floods, and even tornados. For instance, at the end of the calendar year many investors will sell equities that have declined throughout the year in order to claim capital losses on their taxes.
Sometimes it may be beneficial to exit positions before the year-end selloff begins. Some fundamental factors are more long-lasting while others are more immediate, but trading them can be both difficult and rewarding for those who have the intestinal fortitude to trade them.
Also, the fundamental factors listed above are just the start to a list that is much longer in length as new fundamental methods of trading are created every day. So keep your eyes open for new situations that arise and maybe you could be fundamentally ahead of the curve! Check out the additional educational material we offer to help you achieve your goals.
What Is Fundamental Analysis. Central Banks Central banks are likely one of the most volatile sources for fundamental trading. Economic Releases Trading economic releases can be a very tenuous and unpredictable challenge. Weather There are a variety of weather-related events that can cause prices to fluctuate.
Forex Fundamental Analysis. Basics
Forex fundamental analysis is the study of the economy of a particular country or region to assist a trader with trading their currency. Forex fundamental analysis uses various . Fundamental analysis in Forex is a type of market analysis which involves studying of the economic situation of countries to trade currencies more effectively. It gives . Fundamental analysis is a way of looking at the forex market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.