Are you a trader looking to step into the Forex space? Read on to see how you can use fundamental analysis to get ahead.
Forex & Fundamental Analysis 101
There are lots of different schools of thought when it comes to trading, especially when it comes to Forex, but knowing which one to subscribe to can be tricky. One of the more prominent ones is called fundamental analysis and in this article, we’ll be looking at the strengths and weaknesses of this analysis method, which you can check on www.oanda.com and use to gain an edge.
What are the different components of fundamental analysis?
Fundamental analysis and technical analysis are two of the most common and widely used forms of analysis within the Forex world. As you might have guessed, technical analysis uses data to look at the technical components and factors while fundamental analysis looks at the value of an investment and takes into account a variety of exterior factors.
These factors can vary depending on where you get your data from but below we’ll outline some key factors which play a major part in a vast majority of fundamental analysis methods. It isn’t an exhaustive list but these are the biggest and most prominent and you’ll be hard-pressed to find a half-decent analysis that doesn’t include these factors.
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Economic
Economic indicators are usually freely available, released by governments and companies that are publicly traded, but knowing how to make sense of this data is where the money is. To the untrained eye this data could all end up looking the same but knowing how to audit a company or country’s health through an economic lens is a real skill.
What is useful is that because this data is so valuable and important to so many exterior forces, it is often released at regular intervals and so it shouldn’t be too hard to find the most recent data. When looking at a country’s economic health you would most likely look at things like unemployment, housing numbers, and average income, among others.
Gross domestic product
You might be familiar with the term gross domestic product and that’ll be because it is widely used in mainstream news to make a snap assessment of a country’s economic and social performance. GDP, as its commonly known, represents the entire value of a country’s goods and services, including wages and value-added by sales, etc. It’s complicated but is a good measure of worth.
A good way to make sense of this number is to break it down per capita as this puts the number in a way that is more proportionate to the size of the country. An example of this is the fact that India, a country with a colossal GDP, has a huge population, and when you look at their GDP per capita you see that their GDP number is much less impressive. It’s all about proportions.
Production
Looking at what a country is able to produce from an industrial point of view is a good way to gauge whether a country has an effective and self-efficient economy. You can use this to look at the capacity utilization of a country, and then be able to look at whether a country’s industrial sector is at capacity and unlikely to grow, or if there’s still room for it to add value.
This is of particular interest to traders because an industrial sector that is at or over capacity is unlikely to be able to add much more to a country’s economy and increase the value of its currency, meaning that any investment is less likely to result in a quick buck. This isn’t always the case, but it’s a good way of making a quick assessment of potential future activity.
Consumer price index
Looking at the consumer price index is another great way of looking at the volatility of a nation’s economy at home and the effect this has on the general population. CPI, as you might have heard it called, measures the average price of hundreds of different commonly bought products and helps traders assess a country’s domestic financial landscape.
In a trading context, this can be used to look at how much a country’s domestic businesses are earning or losing on commonly bought products, mainly in the FMCG space. One thing to make note of though are products that are sold to other countries, called exports, as this will help you assess how this translates to the international scene.
