Fundamental analysis is when traders examine the social, economic, and political forces, trends, and patterns that might affect the market, that would perhaps affect the supply and demand of a particular asset.
We all know the concept of “supply and demand”, and how it creates a market, correct? Prices are driven up when a large portion of the public are demanding something, and prices tend to plummet the less that the public requires a product, asset, or service. Similarly, the forex market works on the same principles.
Now, it’s not really as simple as one might think. This isn’t about reading one particular headline, coming up with a theory, and then basically convincing yourself that this particular currency pair is going to move a certain way in terms of price action. This certainly isn’t “analysis” by any means.
Fundamental analysis is when you really analyze, truly, the reasons why certain data is coming out. This includes everything from trade numbers to unemployment rates to housing data to consumer confidence, and whatever other statistics that you choose to look at. All of these factors definitely play a role in a particular country’s economy, and their demand for that currency.
Think about this: if a country’s economy is absolutely booming, what’s going to happen? It sure isn’t that far-fetched to think that foreign investment would come piling in, correct? In that manner, there would be more demand for that country’s currency, as more people are interesting in developing businesses there. If they wanted to enjoy their profits from the business in that country, they also would need to purchase these assets IN that currency, as well!
Here’s an example. Let’s go with the idea that the U.S. dollar has been improving, because the U.S. economy is strong. Often times, this leads to raising interest rates, which means that the dollar is even more attractive long-term. Traders and investors will scramble to purchase more of the dollar in the market, and of course, react to data and news that can affect the market.
You’ll learn more about what data is most important later on.
Ultimately, you might find yourself talking like a whole new person – mentioning global interest rates, the Federal Reserve, other organizations, and rattling off statistics like you knew this your entire life. You might impress – or scare your friends, but no worries! You will have to learn a lot to get to that point, and by that time, hopefully you’ll be having a lot of fun, and making lots of money in the process!