When you trade on the forex market there are two analysis methods that you should know about. The first is technical analysis and the second is fundamental analysis. When you use technical analysis you will be analysing the market using forex charts. When you use fundamental analysis you analyse what could happen based on economic and political news. It is important that you know the forex trading strategies that use each type of analysis.
The Use of Fundamental Analysis
Before you can use fundamental analysis you need to know what it is. Fundamental analysis is the using of economic and political news to predict price movements on the forex market. To use this information you have to know what will affect the market and what won’t. You should also have an idea of how great the news’ impact on the market will be.
If you are going to be using fundamental analysis you have to know where to find the information. Details of upcoming releases can be found on economic calendars. There are a number of forex calendars that you can use which only list the events that affect the forex market. These calendars generally categorise the news by the impact level and the currency they affect.
The Forex Trading Strategies that Use Fundamentals
There are some forex traders that say that all forex trading strategies require an amount of fundamental analysis. This analysis generally relates to simply knowing when the news will be released and preparing for a movement. However, there are other strategies that rely primarily on fundamentals to predict the market. These strategies are usually long-term strategies where technical analysis does not offer much help.
How to Use Fundamental Analysis
To trade using fundamental analysis you have to know how the market has historically reacted to news releases. Most reaction can be worked out when you think about how news will affect the perception of investors. If the interest rate news is about to come out you should consider how the results will affect the investor’s view of the country. If the rate increases the impact will be favourable, if the rate decreases the impact will be negative and if the rate stays the same there will be no impact.
When you trade with this analysis you have to look at more than just the news release results. You also have to consider what the market looks like. Many fundamental traders make the mistake of looking on at the impact of the news item and believing that the market will react as it always has. This is a dangerous assumption to make as the market can react differently depending on other factors.
It is recommended that you look at other news releases that affect the same supply chain. If the retail sales are about to be released you should also look at the trade balance and consumer confidence. This gives you an overview of the economy and what this release will mean to investors.
Once you have determined what the news release may say and how it could impact the market you need to prepare to trade. Never open a position before the news has been released and many traders recommend waiting a few minutes after the release. You need to find the strong directional movement created after the news and trade according to this.