Forex Fundamental Analysis Basics

There are two types of analysis methods commonly used in forex trading - technical analysis and fundamental analysis. Forex traders use either or both analysis methods to predict market movements and trends for successful transactions.

While technical analysis remains the most important analysis method in forex trading, fundamental analysis should not be totally overlooked. A forex trader using technical analysis will be at a disadvantage if fundamental analysis is not included in trading strategies. A "technician" needs to consider economic, political and social issues that affect currency markets while a "fundamentalist" also has to keep track of various market signals or the technical side of forex trading.

Fundamental analysis is a method of study that attempts to predict the price actions and trends through analysis of political situations, economic indicators and societal factors. The financial conditions of countries and trading groups are influenced by a host of factors that can affect currency rates.

You can use fundamental analysis to forecast the economic and financial condition of a certain country. Fundamental analysis cannot be used to predict exact currency prices, which are better suited for technical analysis. But if you want to come up with a good trading strategy, you must incorporate fundamental analysis into your forex research and study.

For instance, knowing the GDP growth or unemployment rate of a particular country will give you a good understanding of the overall condition of its economy and the factors behind it. Your knowledge of the global forex market will improve substantially when you study the fundamental factors of the currency markets.

Forex traders using fundamental analysis usually make forecasting models to create a suitable trading strategy. Such models generally use empirical data and try to predict market behavior and future currency values by analyzing previous economic indicators.

There are many forecasting models created by forex traders and every trader has a different view of the same data or information. That is why you have to study the fundamentals first and determine how they complement you trading styles and goals before using your own forecasting model.

One disadvantage of fundamental analysis is information overload. Forex traders may become overwhelmed by the scope and variety of information that they fail to execute their trades properly. With so many factors involved in fundamental analysis, there's a danger of becoming a victim of "paralysis by analysis." It is for this reason that many forex traders prefer technical analysis over fundamental analysis. However, technical analysis alone is not sufficient. Long-term trading success can be best achieved by studying and understanding the numerous factors involved in the forex market.

Don't rely on technical analysis alone. Learn fundamental analysis and see your profits skyrocket. But don't take in all the factors since they are just too many and diverse. Just select a few fundamental factors that matter the most and you will be successful in your fundamental analysis methods.