Basic Of Fundamental Analysis
In Forex trading, Fundamental analysis is the study of economic news events. Forex traders watch economic data very closely, as changes in the health of an economy can effect currency prices. As a rule of thumb, nations with strong economies will experience increased demand for their currency as businesses and individuals raise their level of investments. Therefore, if an important news event shows economic growth was better than expected, it can lead to Forex traders quickly buying that currency on expectations that the positive data will lead to increase demand of that currency in the future. The opposite is true if results are worse than expectation. For the most part, Forex traders focus on the major economic releases.
If a central bank raises its interest rate, it means that holders of that countries currency will receive higher yields for their cash investments. The higher interest rate will than attract new demand for that currency.
Although often termed a lagging indicator, employment data is the second most watched economic event. This is due to the fact that countries with growing employment levels are considered to exhibit a healthy economy.
The trickiest of all economic indicators is CPI. CPI measures a country's inflation levels. Falling inflation levels will often lead to currency weakness as Forex traders view a weak CPI reading as signs that a county's economy is slowing. However, too much inflation can also be negative as may be an indication that a country's currency is being devalued. Ideally, Forex traders like to see CPI around 2-3.5%.
These surveys measure whether a country is experiencing growth within its Manufacturing sector. Depending on the country and how large a component manufacturing is, changes in surverys can trigger large moves in currency prices.
These reports follow month to month buying patterns within a country's Retail sector. Rising sales could indicate that consumers feel confident about their country's financial health and often leads to overall increase in economic growth.
In Forex trading traders use Technical Analysis to measure supply and demand. Technical Analysis is derived from mathematical formulas that analyze overall changes in price. For the most part, traders will use Technical Analysis to measure whether a Forex pair is undervalued, overvalued, or whether its momentum is building which could cause a sharp change in prices.
CFD (Contract for Difference) is a contract between two parties known as "buyer" and "seller", the price of which is based on the base asset, for example an index, stock or commodity future. CFD trading offers traders a number of advantages over trading the underlying asset directly. In addition to trading currencies contracts for difference significantly increase trading opportunities for traders using various classes of financial assets in their trading strategies. Enjoy the following benefits of CFD trading:
There are two types of trends; up trends and downtrends. An uptrend occurs when a Forex pair is moving high and also trades at higher highs as it rises. This is an indication that buyers are becoming more aggressive. A downtrend occurs when a Forex pair moves trades at lower lows as its price falls.
Support is a level of buying demand, while resistance is an area of selling pressure. For example, if one looks at a chart and sees that on every drop of the EURUSD to 1.3000 it quickly jumps to 1.3100, this will indicate that there is buying demand at the 1.3000 level that is supporting prices.
Moving averages are calculated by taking the average price over a series of time. For example, a 50 period moving average, calculates the average price over the last 50 periods of a Forex instrument. Forex traders use moving averages for possible support/resistance levels in the market.
Bollinger bands measure the standard deviation of a moving average. It is used to determine when Forex instruments are overbought or oversold. Depending on the strategy, Forex traders will often buy when current prices trade.
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below the lower Bollinger Band and sell when prices rise above the upper Bollinger Band.
Relative Strength Index (RSI) - RSI measures a trading instrument's recent gains versus losses over a given period of time. A rising number indicates upside momentum is increasing.
Always have a plan - Poorly thought through investment is the number one reason why people lose their money. Know a few fundamental cornerstones of your trading strategy before you run out and invest. What currency pairs are you most interested in? How long are you planning to hold on average? What basic targets are you going to set? Of course, you need to be flexible- but good strategizing starts with a good plan. Decide which platform you want to use now too. MetaTrader is the globally dominant option.
Know your market - Getting some basic Forex knowledge under your belt is critical before you do anything else. Once you start trading, keep a record of what you do- this ability to analyse trends will help stop you making bad mistakes a second time. Now, decide if you want to take a technical (chart based) analysis method or opt for fundamental (raw data) analysis. They both have pros and cons, though laypeople generally prefer technical as it’s ‘easier’ to manage. However, we strongly suggest social trading strategies like using Forex signalling.
Not only does this make it much easier to follow and understand, it also simplifies and takes the stress out of Forex trades.
Manage your risk - There is a host of tools on and Forex platform you use, to help you minimise loss. Stop/Loss and limit orders will do wonders to keep any disasters mitigated. You need to learn to be a disciplined trader too, and hold to your plan not make emotional judgements. Don’t overtrade, don’t get emotional about trades and be smart with your limits.
Expand knowledge - Use webinars, seminars, books and resources to your advantage. MetaTrader offers some good resources to start off with.
Be Patient - React in haste, regret at leisure. Keep control of your emotions, and don’t let the waiting game psyche you out. You’re a trader and not a gambler.
While we personally love social trading as a Forex technique, there’s top tips will help you improve any trading style. If you want to start trading commodities now, you can follow the link to get started today!
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