Fundamental Analysis

Any smart trader knows that in order to be successful they must
be able to analyze the market and predict price movement. This is
true whether you trade in stocks, bonds, commodities, currency,
or any other for of security.

Analysis can be done in two different ways: fundamental analysis
and technical analysis.

Technical analysis is the study of prices. The goal is to analyze
the history of price movement in an effort to predict future
prices.

Fundamental analysis is the study of a nation's overall economic
health. I like to think of this as "Big Picture" analysis. The idea
is that the strength of a nation's economy will affect the supply
and demand for its currency, which will in turn affect the price of
the currency.

For example, let's assume that the US economy is in a major upswing.
Since the economy is strong, the value of the dollar will be expected
to rise and currency traders will invest heavily in the dollar. This
bullish behavior becomes a self-fulfilling prophecy and the dollar
rises in value.

That's a pretty simple concept, but judging the health of a nation's
economy is no easy task. There are many factors to consider, and two
traders may look at the same figures and interpret the data differently.

Fundamental analysts look at various economic indicators for signs of
an economies strength. Some of the indicators they analyze are the
interest rate, unemployment rate, consumer price index, and gross
domestic product (GDP).

These reports are released regularly by various government agencies and
non-government entities. You should find the latest schedule of upcoming
releases and put them on your calendar. Keep an eye on them for a few
months and see what effect they have on currency prices.

One thing to keep in mind: it is not always the numbers contained in a
report that have the greatest impact, but rather the relation of the
numbers compared to what was forecasted.

In other words, a rise in interest rates may not have a significant
impact if forecasters were expecting it. But if they were expecting
interest rates to remain steady and there was an unexpected increase,
there may be a large impact on currency prices.

A major disadvantage of fundamental analysis is that it can be a little
too "big picture". It is great for predicting overall economic growth
and price changes, but it doesn't offer enough details to target specific
entry and exit points. This is where technical analysis comes in.