Fundamental Analysis in Forex Trading
Fundamental Analysis involves the analysis of the political
and economic status of a country or countries that use a particular currency
and how those factors will affect its relative value.
Economic factors that can cause the price of a certain
currency to rise include:
- Low
unemployment rates.
- High
interest rates.
- Low
inflation rates.
Economic and political factors that can cause the price of a
certain currency to fall include:
- High
unemployment rates.
- Low
interest rates.
- High
inflation rates.
- War.
The Fundamental Analysis data can be provided by your broker
or Forex news sites like forexfactory.com, dailyfx.com and CNBC.
Also, because most traders trade currency pairs that have
the US Dollar, you should follow major US news and announcements like the
Nonfarm Payroll and announcements by the Federal Reserve.
Inflation is a general increase in the cost of living in an
economy. This means that each unit of a currency in that economy buys fewer
goods and services.
For interest rates, high interest rates make borrowing money
from banks difficult, forcing people to spend less. This lowers inflation.
Also, high interest rates are good for people to save money
in the banks, due to the high returns. This also makes people to spend less and
save more. This also lowers inflation.
The lowering of inflation in an economy, makes investors to
buy the currency that that economy uses. This increases its price due to the
high demand and perceived value.
Fundamental Analysis Example
For Fundamental Analysis, a perfect example to look at is
the US Dollar against the Russian Ruble.
On 24th of February 2022, Russia declared war on
Ukraine.
Due to this political instability in Russia, investors who
had Russian Rubles in their accounts started to sell them to acquire the more
stable US Dollar.
Due to this increased supply and low demand of the Russian
Ruble, the price of the US Dollar against the Russian Ruble rose exponentially,
The war declaration was a good opportunity to buy the US
Dollar against the Russian Ruble.
Due to the rapid fall in value of the Russian Ruble, the
Russian Central Bank had to do something.
The Russian Central Bank increased interest rates from 9.5%
to a whopping 20%.
Russia’s strategy worked. The high interest rates enticed
investors to buy the Russian Ruble.
This lowered inflation in Russia and the Russian Ruble started
to rise in value again. The price of the US Dollar against the Russian Ruble
lowered, as you can see in the downtrend after the exponential rise in price.
Placing and Exiting trades using Fundamental Analysis
Trades placed through Fundamental Analysis are long term
trades most of the time.
Such long-term trades favour investment institutions because
they have large trading accounts that can withstand the ups and downs of the
market.
About exiting such trades, a stop loss must be there but you
don’t have to set a take profit order. You can use something known as a
trailing stop loss.
Trailing a stop loss, is when you move your stop loss if the
trade goes to your direction.
Let’s say you bought USDJPY, and the USD goes up by 20 pips.
To trail your stop loss with the price, you will also move your stop loss up by
20 pips. Do this regularly as the trade goes to your side.
By doing this, you will secure a profit even if the trade
finally hits your stop loss order.
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