FOREX: Fundamental Analysis

A fundamental analysis is one of the most difficult but at the same time the key analysis on the forex market. To carry out the fundamental analysis is much more complicated as one and the same factors can either exert irregular importance under different circumstances or can turn into absolutely insignificant after their being of much value. The success of the fundamental analysis lies in the clear determination of the interrelation and the influence of two different currencies on each other. Consequently it is essential to know and to understand certain political events, the relations of different countries, their development, the history of currencies’ development. Besides, it is important to be able to predict the cumulative result of different economic programs and to establish a link between the events which may seem to be absolutely unrelated.

Within the framework of the fundamental analysis specialists familiarize with various reports on the world monetary and financial development. They learn about political and economic life of not only separate countries but also the world community as a whole.

The main purpose of the fundamental analysis is to define which events can influence the development of forex and what kind of changes in the currency rates these events can lead to. The information about the work of exchange houses and large companies, discount rates by central banks, economic policies of governments, potential changes in political regimes as well as all sorts of expectations and rumors may turn out to be crucial when conducting the fundamental analysis.

The main difference between the fundamental and the technical analysis consists in the statement the fundamental analysis is based on. It implies that forex prices are the reflection of the supply and demand which, in their turn, depend on the fundamental economic factors. Those who admit the technical analysis claim that there is no need to seek the reasons for the exchange rates changes. It is enough to analyze the prices themselves. The technical analysis engages in making short term prognoses (from 1 minute to 1 week) on the forex market while the fundamental analysis deals with medium term or long term predictions. In order to be able to launch long term prognoses it is necessary to research the internal reasons for the exchange rates changes which will enable the specialists to estimate the dynamics of currencies supply and demand.

The fundamental analysis has its disadvantages. It is rather complicated and time-consuming to track the changes of all the fundamental indicators with their own causative-consecutive relations in each country which fall under observation. The other disadvantage is that the fundamental analysis is useless to practice for short term trades because it may turn out that a trader does not have enough money for current losses on open positions in several figures which are applicable while exploiting medium term trading.