It is commonly said that the basis of profitable Forex trading is information but, despite the fact that accurate and up-to-date information is indeed essential for currency trading, it is the examination of this information that is the real secret. There are currently two main types of analysis used in currency trading � technical and fundamental analysis - and here we look at precisely what is meant by fundamental analysis. At its simplest, fundamental analysis examines economic and political conditions that might have an affect upon currency prices and Forex traders who use fundamental analysis rely upon news reports for information about a whole range of things including inflation, growth rates, economic policy and employment rates. Basically, fundamental analysis gives an overview of currency movements and a broad picture of economic conditions that might well alter the value of a particular currency. With this picture in mind, foreign currency traders will then normally go on to use technical analysis to plot entry and exit points in the market and to extend the information gained from fundamental analysis. The foreign currency market is very much like other markets and is affected by the laws of supply and demand, which are themselves affected by economic conditions. Two economic factors affecting supply and demand are the strength of the economy and interest rates and the strength of the economy is affected by the gross domestic product (GDP), foreign investment and the country's balance of trade. A whole variety of economic indicators are released by governments and by other sources and are generally held to be reliable measures of economic health that are followed by all sections of the investment market. The majority of economic indicators are released once a month although a few are issued more often and usually weekly. Two of the most important fundamental indicators are interest rates and international trade figures, but other particularly useful indicators include the producer price index (PPI), purchasing manager's index (PMI), consumer price index (CPI), durable goods orders and retail sales. Interest rates are an extremely important indictor as they can have a weakening or strengthening affect on a particular currency. High interest rates could, for example, attract foreign investment which strengthens the local currency, while investors in the stock market normally react to rises in interest rates by selling in the belief that higher borrowing costs will have an adverse affect on many companies. High volume selling by stock market investors can quite often result in a downturn in the stock market and the economy. Indicators of international trade are also very important for the foreign currency trader. A deficit on the trade balance, with imports exceeding exports, is usually seen as an adverse indicator as money leaving the country to purchase foreign goods could well have a devaluing affect on the currency. However, fundamental analysis will also provide an indication of the expectations of the market and these will generally determine whether a trade deficit is unfavorable. It might be the case, for example, that a particular county usually operates with a trade deficit and that this has already been taken into consideration in fixing the price of its currency. Generally, a trade deficit will only affect currency prices in cases where they are higher than the market would ordinarily expect to see. Each country has its own particular set of economic indicators (there are currently some twenty-eight major indicators used in the US) and these have a strong influence on financial markets. As a result, Forex traders must be conversant with them and examine them carefully when they are preparing their trading strategies. Fortunately, for traders working online, many websites now carry an abundance of the latest information, but it is up to individual foreign exchange traders to extract this information and apply the principles of fundamental analysis to it before making their trading decisions.
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