Fundamental Analysis (FA) is one of the main methods to predict the future exchange rate of the currency. Try to understand the livelihoods or “building blocks” essential to an economic system through the study of a diverse range of economic, political, social trends and legislative frameworks of a country. Fundamental analysis helps to understand the formation of prices and to predict the factors that produce changes in the future as well as primary processes that make the functioning of the market.
However, it is not advisable to base decisions only on forex trading fundamentals, because these do not provide information on entry and exit points, making it difficult to control risk when using leverage. A successful trading strategy should contain a combination of fundamental analysis and technical. The first is to help build a trading strategy. The main difference between them is that fundamental analysis is applied only to a particular market and says what “should happen” (the cause), on the other hand technical analysis focuses on what “actually happened” (effect) and allows experienced analysts to follow multiple markets.
The basic trading strategies are based on macro advice on where a currency should trade based only criteria related to price action. This includes usually know the economic conditions of the country that the currency represents, monetary policy, and other essentials.
Economic Indicators
Economic indicators include a wide variety of statistics, figures and financial evaluations. This information is analyzed and provided by various financial organizations around the world, as central banks and national treasuries. The professional traders closely follow those indicators for making decisions and are attentive to the dates that are issued each. For this is that we use economic calendars.
Continuing, are some examples of economic indicators used most frequently in the United States that affect foreign exchange market trends generating and editing changes.
• Consumer Confidence Index: This consists of a survey based on a sample of 5,000 U.S. households. It is considered one of the most accurate indicators of the level of confidence and is of great importance since the consumption set two thirds of the U.S. economy. It is assumed that trust and power consumption increases when there are more jobs, increase wages and fall when interest rates.
• Report on Employment and the Employment Situation Report: They gather data from 375,000 businesses and 60,000 households, including: number of jobs created or eliminated, average salaries, average weekly hours worked, etc. Divided by economic sectors. The report of employment status is an indicator showing the monthly changes in the unemployment rate and the average number of hours worked a week and average hourly earnings, which would give a measure of labor market tension, a determinant of inflation.
• Ads Rates FOMC (Federal Open Market Committee): The interest rate of one currency in circulation is the price of money. As it stands, most people try to hold and buy the currency, strengthening the value. This is a very important indicator of the inflation rate and a great promoter of the market.
• ISM Manufacturing: This index consists of a compilation of data collected from purchasing executives in over 400 industrial companies. Reflects a composite average of 5 key economic areas (new orders, purchasing, manufacturing, use, purchase orders, and inventory). Above 50 points means the growth of economic activity, and below contraction.
• NonFarm Payrolls: It tries to reflect changes in the total amount of payments of any workers except government employees, staff of private homes, employees of nonprofit organizations, farm workers. Represents approximately 80% of workers who produce the total GDP of United States. It is used to help the government determine the current state of the economy and predict future levels of activity.
• Sales and Retailers: The retail sales are a key driving force of the American economy (two thirds). This indicator measures the total consumer spending in retail sales. It is used as a measure of the activity and consumer confidence.
• Tankan Survey: Economic Survey of the Central Bank of Japan that includes thousands of Japanese companies with a minimum specific capital, and is used in formulating monetary policy. Includes questions about current trends and conditions in the workplace and their respective industries, as well as its prognosis on the level of economic activity for the coming quarter and year. It is a great promoter of the forex market for JPY pairs.
• Trade Balance: It is the largest component of the balance of payments of a country. The trade balance measures the difference between the value of goods and services that a nation exports and the value of goods and services imports. Trade deficit exists if imports exceed exports, and surplus in the case. It is a big market mover.
• Composite Index of Leading Indicators: An index used to predict the direction of economy in the coming months. It consists of ten indicators: 1. Amount of average hours worked by employees in manufacturing, 2. Amount of applications for unemployment insurance, manufacturing 3. Amount of new orders for consumer goods, 4. The speed distribution new merchandise to vendors, 5. Amount of new orders for capital goods unrelated to defense, 6. Amount of new permits for construction of residential housing, 7. Indicator of S & P 500, adjusted for inflation 8. Added money, 9. The gap between interest rates in the short and long term, and 10. Consumer sentiment.
• Industrial Production Capacity / Capacity Used: It is a measure of changes in the production of factories nationwide, mines and utilities, as well as industrial capacity and the amount of resources being used. These indicators are very important because the third manufactured shape of the economy.
• Initial Unemployment Claims: Number of people seeking unemployment benefits for the first time. It consists of large weekly fluctuations, so the average of four weeks is a more stable data.
Indicators of inflation are generally used when it comes to predicting the direction of a currency in the forex trading day. Inflation has a material effect on various economic factors including interest rates, unemployment and the price on-line foreign exchange. One of the measures usually taken to combat it is to raise interest rates. The instant effect on forex market is that the specific currency of that country increases its value. At that time the currency is sold and he falls again, which in the long term, an increase in inflation means a drop in the price of the currency.
The indicators of inflation include:
• Consumer Price Index (CPI): A measure used to measure inflation and as an indicator of effectiveness of government measures. It is one of the indicators used in forex trading, as the monitoring of changes in commodity prices, can predict changes in foreign exchange.
• Price Index of Production: It is also a good indicator of inflation, but not as much as the Consumer Price Index. Reflects the change in input costs of manufacturing. It consists of several indexes that cover a wide range of areas affecting domestic producers.
• GDP (Gross Domestic Product): This is a crude measure of market activity. Represents the monetary value of all goods and services produced by an economy in a given period (usually annual, quarterly cut). It includes consumption, government purchases, investment and trade balance. Indicates the growth rate of the economy.
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