Fundamental Analysis:An Introduction for Forex Traders.

Two types of analysis are used for the forecasting of price movements: fundamental, and technical (the chart study of past behaviour of market prices). The fundamental method focuses on the theoretical models of exchange rate determination and on the major economic factors and their likelihood of affecting the foreign exchange rates.

Fundamental analysis is made up of economic, financial, and political factors. Economic factors as opposed to the other two factors have scheduled release dates. The dates and times of economic data release among the industrialized nations are known well in advance. Traders carefully watch for certain economic data as it can trigger or be an indication of some future positive or negative economic factor. Economic data is generally released on a monthly basis.

When an economic indicator is released it shows two numbers. One number is the indicator for the last month and the second number is the revised figure for the month prior to that. For example, in October, economic data is released for the month of September, the last month. The release also includes revisions for previous months. Revisions are important for traders as major revisions could influence the market to react either bullish or bearish.

The schedule of when and which economic indicators are going to be published is printed in  all leading financial newspapers (Financial Times/Wall Street Journal) and magazines (Business week), or traders use the monitor sources, Reuters, or Bloomberg, to collect information from news publications and from the news wires own up-to-date information.

Although there are many indicators which are released not all of them affect the forex markets. However, the indicators which trigger key trading signals are: Industrial production which is an important economic indicator because it reflects the strength of the economy and the strength of a currency, so traders use this indicator as a trading signal. Capacity utilization can indicate that output levels are reaching full capacity and the economy is overheating and inflation could be on the rise. Traders would regard such indications as a trading signal. Durable goods orders are a good indicator of consumer confidence and show a consumers tendency to spend. This is generally a bullish trading signal for the domestic currency. Inflation is an important number for traders and they follow the indicators that reflect inflationary trends very closely. The indicators they watch are: Producer Price Index, Consumer Price Index, GNP deflator, GDP deflator and the Employment Cost Index.