When it comes to the types of analysis techniques used by forex traders, in simple terms, fundamental analysis involves data collection and analysis from economic data reports and news headlines for social, and political forces that may affect currency prices. It is a much broader term that describes the act of trading based purely on global aspects that influence supply and demand of currencies, equities and commodities.
Traders mostly use both fundamental and technical methods to determine when and where to place trades, but they also tend to favor one over the other. However, if you would like to use only fundamental analysis, a variety of sources can be utilized to base your opinion.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. In other words, traders have to look at different factors to determine whose economy is going in the right direction and which is following backward trend.
The most important factor is that a trader have to clearly understand the reasons why and how certain events like an increase in the unemployment rate affect a country’s economy and monetary policy which directly or indirectly affects the level of demand for its currency. The idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen.
The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that particular currency.
That’s a glimpse about how and why fundamental analysis helps in forex trading.
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