FUNDAMENTAL ANALYSIS in Forex Trading

 

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:

1. Low unemployment rates.
2. High interest rates.
3. Low inflation rates.

Economic and political factors that can cause the price of a certain currency to fall include:

1. High unemployment rates.
2. Low interest rates.
3. High inflation rates.
4. 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 24^th 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.