Fundamental Analysis – is a study of the economic situation that affects the value of nation’s currency. Fundamental analysts believe that information on the big political, economic and social events has big impact on currency market moves. Lots of traders keep an eye on the various economic indicators that moves the particular currency. The major indicators are Gross Domestic Product (GDP), Retails Sales, Consumer Price Index, Employment and Unemployment rates. Note that these indicators are only for the one nation’s currency, so it’s highly important to keep in mind there are other factors that could affect the price and volume of that particular currency, such as the economic indicators of the other currency in the pair, various technical indicators and revisions of the economic data that was just released.
Fundamental Forex traders use information about the global and national economies, and the financial state of the companies involved, as well as non financial information such as current political and weather information. Fundamental Forex traders believe that the Forex markets will react to events in certain ways and that they can predict future Forex market prices based on these events.
For instance, a Forex Trader for a given currency pare studies the supply and demand for the country’s currency, products or services; its management quality and government policies; its historic and forecasted performance; its future plans and the most important for the shorter term, all the economic indicators.
From this data, the Forex Trader constructs a model to determine the current and forecasted value of a currency pare. The basic idea is that unmatched increases in supply tend to depress the currency value, while unmatched increases in demand tend to increase the currency value. Once the Forex Trader estimates natural value, he compares it to the current exchange rate and decides whether the currency ought to rise or fall.
Fundamental forex traders need access to all of the available information as soon as it is available, and are therefore often institutional forex traders with large support teams, rather than individuals. Fundamental Analysis has probably been in use since there were markets to trade, and has traditionally been done manually, but as computing power increases it has become possible for some fundamental information to be processed automatically.