Forex: the basics of fundamental analysis. |
In the practice of currency dealing, there are two fundamental approaches to the study of the market in order to determine the priority direction of its movement – technical (graphical, indicator) analysis and analysis of fundamental economic factors.
The idea of technical analysis is that in order to determine the trend of price movement in the market, one should observe the price movement using special methods (analysis of graphic models, analysis of mathematical indicators), assess the probability of its dynamics in one direction or another. In the aspect of technical analysis, trying to look for the reasons for the observed change in the exchange rate is inappropriate.
The “technical approach” is most popular for analyzing prices over relatively short periods – from weekly charts to a 1-minute time frame. It should be noted that the “fundamental approach” to market analysis on such short time intervals has no practical meaning (a kind of exception is “news trading”), since information that is essential for fundamental analysis becomes public knowledge, as a rule, no more than one once a week.
The study of fundamental economic factors and circumstances is most justified if the task is to identify trends in the medium and long term in Forex. For this kind of market forecasts, it is necessary to identify and analyze the basic relationships (causes and effects) between global changes in the foreign exchange market and the economic prerequisites that determine this dynamics. Price fluctuations on time intervals of less than one day, from the point of view of deep fundamental analysis, are nothing more than “market movement obstacles” that should be “filtered out”.
The fundamental postulate of the “fundamental approach” to the analysis of the foreign exchange market can be formulated as follows: the basic trends of Forex are predetermined by the interaction of supply and demand in the foreign exchange market, which, in turn, are complexly dependent on various kinds of economic factors and circumstances.
A fairly conditional grouping of economic indicators that “fundamentally” affect the Forex market situation may look like this:
- Investment and trading capital movement indicators
- Financial asset market indicators
- Generalized macroeconomic indicators
- Industrial and commercial development indicators
- Employment and labor market indicators
- Indicators of price dynamics (inflation)
- Indicators of monetary and credit policy of the state
- Real estate (construction) market indicators