Fundamental Analysis Studies Economic, Social, and Political Factors

People have devised more than one way to be successful in trading. A few of these ways are market analyses. A market analysis helps develop trading ideas that they can use to make the right move and go home with hefty profits.

The three types of market analysis

There are generally three kinds of market analysis, and we have listed them in the enumeration below:

  • Technical analysis
  • Fundamental analysis
  • Sentiment analysis

Today, we will tackle the second one, which is the fundamental analysis that tackles social, economic, and political topics.

What is fundamental analysis?

Fundamental analysis is a study of economic data, news reports, and news headlines that affect a price and its direction. Today, there is the massive and comprehensive use of advanced technology like computers, handheld phones, electronic devices, and the internet. Due to this fact, social media ad people can also impact the prices and currency pairs that we trade. Even some of the world’s leaders make remarks and comments about anything under the sun that can massively impact the price direction of a particular currency.

The forex market can be massively affected by economic, social, and political matters. People, especially traders, are monitoring these elements since these can affect the way we trade.

Economics and forex trading

In economics, the main focus is supply and demand as it determines the price. In forex trading, we also look at the angle of supply and demand since it can also determine the exchange rate. If we know which direction the supply and demand go, we will also see where the price heads.

But the question is: how do we know the direction of supply and demand? There are a lot of factors that may determine the status of different economies. Some of these factors include certain events like unemployment and recession. If a country experiences a recession, then the economy is affected. It is like a domino effect since the monetary policy will also get involved, then, later on, this country’s currency demand will also get affected.

So, we can conclude that if a country’s current and the future economic state looks like it is going well, then the currency will also be strong. If the current and future economy is looking at recessions and other problems, then there will be less demand for the currency, making it weak. As a country’s economy strengthens, it is automatic that more foreigners will be interested in investing with them. So, these foreigners will need to buy more of that country’s currency to have the items they want to support.

To summarize fundamental analysis

If a country’s economy is going well, it may need to raise its interest rates to control inflation. Higher interest rates mean more attraction for that country’s financial assets. Traders and investors need to buy the country’s currency first to get these assets. The country’s currency becomes in demand and will be more robust than the others with lesser demand. Fundamental analysis studies these angles in trading. Trading is not just prediction and pure luck. A good trading decision has a solid basis.