We’ve now come to one of the most exciting topics in this course, which is analyzing the Forex market. Now that we know the history and the working of the Forex market, we’re all set to predict the future of the market. Several types of analyses are used by traders across the world to analyze the Forex market. However, these analyses can broadly be classified into three types.
In this lesson, and the lessons coming forward, we shall be discussing all these three types of analyses.
Types of Forex market analysis
The three types of forex market analysis are:
- Fundamental analysis
- Technical analysis
- Sentimental analysis
Now, you must be wondering which one of them is best for analyzing the markets. Well, if you look at the most successful professional traders in the industry, they analyze the market by considering all the types. In this lesson, let’s understand the most essential Fundamental Analysis.
Fundamental analysis, as the name pretty much suggests, is the way of analyzing the market by studying the economic, social, and political forces in the country. These factors are considered because they affect the supply and demand of an asset.
The whole idea of trading using fundamental analysis is by considering the factors that affect the supply and demand of a currency. These factors are technically referred to as fundamental or economic indicators.
The concept behind this type of analysis is straightforward. If a country’s currency or economic outlook is good, then there is a high probability that the currency will show strength in the future and vice-versa.
What are the major economic indicators?
Below are some of the economic indicators which have the power to shift the economic situation of a country.
One of the most popular and important economic indicators are interest rates. There are several types of interest rates, but we will be focusing on the basic form of the interest rates set by the central banks. Central banks are the creators of money. This money is borrowed by private banks. And the percentage (interest) or the principle the private banks pay to central banks for borrowing the money is called a nominal or a base interest rate.
If the central banks wish to boost the economy, they decrease the interest rates. This then stimulates borrowing by both private banks and other individuals. And this, in turn, increases consumption, production, and the overall economy. Lowering the interest rates can be a good way to inflate the economy but can be a poor strategy too. Because in the long term, low-interest rates can over-inflate the economy with cash and create an unbalance in the money supply.
So, to avoid this, central banks increase interest rates. And this increase results in less money in the hands of private banks, businesses, and individuals to play around with.
Inflation, as the name pretty much says, is fluctuation in the cost of goods over time. Inflation, too, is a vital indicator for economists and investors to forecast the future economy. Inflation will have a good effect on the economy if done uniformly. But, too much inflation can bring the balance of supply and demand on the tip in favor of the supply. And this eventually will bring down the value of the currency.
Apart from these two, there are many other macroeconomic indicators that traders consider to do their fundamental analysis. Some of them include GDP, PPI, CPI, Unemployment Rate, Government Debt, etc. Indicators like these help the investors & traders in analyzing the market and predicting its future.
This completes the lesson on fundamental analysis. In the next lesson, let us understand the insights about technical analysis. Don’t forget to take the quiz below before moving ahead!