In forex trading, the ability to predict currency movements will help you make profits consistently. One technique you can use to make such predictions is to do a fundamental analysis of your destination currency pair. According to Forex Training Group, fundamental analysis is one of two main methodologies for evaluating and forecasting movements in currency exchange rates.
There are a variety of fundamental analysis methods that you can learn when learning online trading. However, almost all have the same basis.
Here are several easy steps that you can follow to start doing fundamental analysis:
Determine the currency pair you want to trade
Fundamental analysis is a method of analysis of the fundamental conditions or economic foundations of a country. For this, determine the currency pair that you want to study. For example, if you want to trade EUR / USD pairs, then studying the economic conditions of European countries and the United States is the right step.
Learn the general conditions of the currency other countries
Does the country have a strong political system? What are the monetary policies implemented by the local government?
Although it looks unrelated, a country’s financial condition is greatly influenced by the political stability and living conditions of its people. The more secure and prosperous a country is, the more likely the value of its currency will experience strengthening. Even so, you should beware of several events such as elections or power changes that are likely to affect the country’s financial policy.
Record economic data that affect currency prices
The currency valuation of a country is very dependent on economic values. To be able to determine trends in price movements, you need to pay attention to economic factors such as:
Economic Growth / Gross Domestic Product (GDP)
Generally, the greater the GDP of a country, the stronger the value of its currency. Especially if GDP has experienced consistent growth.
Trade Balance & Current Account
The trade balance shows the comparison of a country’s imports and exports. While Current Account is a record of the results of a country’s transactions with other countries in the world, including records of net trade in the goods and services sector, the number of transactions and investments that occur, and payments that have been made within a certain time.
Unemployment Rate
A low unemployment rate indicates good economic growth and has the potential to increase the value of the currency.
Reference Interest Rate
The higher the benchmark interest rate set by a country’s central bank, the more likely the country’s currency will rise.
Comparison of current economic data with previous data
The next step is to compare the data with the same data in the previous period. Is economic performance has increased or decreased? If it rises, it indicates an increase in economic performance that can drive the value of its currency. Meanwhile, if it goes down, the opposite applies.
Conclude and open an appropriate trading position
Finally, summarize all the data that you have obtained in the analysis of price movements. Open your trading position following the results of the analysis that you have gotten to make a profit.
Keep trying and good luck, traders!