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Understanding the Importance of Fundamental Analysis in Forex Trading

Published on 24 June 2021

Forex trading is not the blind game. Here you have to learn, need to understand a lot of things. Forex analysis is the most important part for traders.

In forex trading, fundamental analysis is a method of forex market analysis involving the study of how economic indicators, government policy, and social factors impact currency prices. During the study, the economic conditions of the countries involved in forex trading are analyzed. Forex traders need to stay abreast of these variables to make insightful forecasts.

The fundamental analysis gives information on how major political and economic events influence the forex market. Currency prices also move based on essential decisions by politicians or statesmen regarding economic numbers.

For instance, a speech by the governor of a central bank may impact your trading decisions. These must be checked regularly.

Forex Trading: Understanding the Forex Calendar

A forex calendar is prepared by economists and contains their predictions on upcoming economic figures calculated based on the latest and upcoming economic news.

These figures are compared against the actual data after it is announced. The level of volatility in the forex market is based on the importance of this data after the news release. The initial 3 to 4 minutes see the highest volatility that may take more than 10 minutes to settle down and reflect the latest market trend.

Volatility is influenced by the extent of the difference between the forecasted data and the actual data.

Forex Trading: Fundamental Economic Data to Watch Out For

The following economic figures influence forex trading decisions:

Interest Rates

Higher interest rates mean a stronger currency, encouraging investors to move their assets to the country having higher rates.

Trade Balance

A trade deficit is a sign of a weak local currency. It is essential to understand for traders to make a successful trade.

Employment

A decline in employment reflects a weak economy, which could result in a lowering of interest rates.

Gross Domestic Product

This is the primary indicator of a country's economic health and is closely followed.

What is most important is that fundamental analysis in forex trading must be used the right way. So, traders must learn how to use this data for their benefit.

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