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Main » Articles » Forex for Beginners

Fundamental Analysis
Whether we are talking about the stock market or the Forex market for both it means economical news though it differs in the way we derive those news.

For the stock market it means analyzing the financial statements of the company and finding the real value of the stocks to predict future cash flows and profits made by the company, as for the currency market it depends on the Interest Rate, Economy Growth and Inflation affected by economical, social and political factors which in the end will create the demand and supply powers in the market.

Fundamental Analysis is used as a tool to help investors deciding on their strategies so stock market participants will try to find miss-priced (under valued or over valued) stocks and try to capitalize on that and consequently the demand or supply level will change on that company's stocks depending on that company's situation driving the price up or down to its real value.

If we want to conduct fundamental analysis for the stocks we have to take into consideration quantitative and qualitative methods, as quantitative methods is conducted through numerical and statistical equations taken from the company's financial statement, looking through its profits, revenues, assets and liabilities, and analysts use a lot of ratios to examine that company's condition.

As for the qualitative analysis it concentrates on the intangible aspects of that company such as the level of integrity of the board of directors and the management, the brand name recognition, the level of technology they use, patents, competition.

The analysis is based on historical and present data. It's very important to know if the company you want to invest your money in is worth that investment or not, what is the level of risk you will bear for the return you will get? What is the level of their revenues growth? Is the company is making profits or losses? What is the company's position in its industry and whether or not could it compete with its competitors? What is the level of credibility their Board of Directors and Top Management have? And a lot more of questions but they all serve the same purpose the projections of that company's financial situation and its current situation.

Moving on to our main focus which is what does Fundamental analysis mean for the Forex market???

It almost means everything as the Forex market is more sensitive to the political, economical (macro and micro), and social factors surrounding the economy, because it's a bit difficult to decide the exact point to where you enter the market and the exact point of where you exactly get out, so it's based on investors beliefs.

So in order to decide what positions do we take in the currency market we have to understand the overall condition of the country meaning their political policy as well as the economical news We have to look for the surprise part in the news because that's the reason why demand and supply forces move in a certain way resulting in the currency to incline or decline, an appreciation in the value of a currency will happen when demand increases on that currency meaning taking buying positions on that currency on the other hand a depreciation in the value of a currency will happen when the supply increases meaning taking selling positions on that currency.

The central bank when deciding the interest rate they look at the several factors in the economy as they will start looking on the income as it goes in two parts Spending and Savings, the central bank looks at the consumer's spending patterns if they spend this will mean that the sales will increase meaning more production is needed to meet the increasing demand for products which will lead to increase in Employment to meet the new levels of production which means active and growing economy which might lead eventually to inflationary pressures and the central bank might hike their interest rate in order to bound inflation on the other hand if consumers are saving their money instead of spending it as it provides a more attractive return, this will affect the economical cycle driving the growth levels down so an interest rate cut might be needed which will provide more money in the economy to spend on products and help the growth level increase.

All economies have the same cycle in terms of recession and prosperity if the economy's growth is in a continuing slowing pace it means recession and as mentioned before this is very likely to be faced by the central bank by an interest rate cut providing more money in the economy that is to be invested instead of saving it this phase is called the recovery and it will lead to prosperity but the cycle will repeat itself in a reverse way to reach eventually the recession phase and the same as before will happen again.

Let's take this situation as an example if the several indicators for the economical health and activity showed us that the country's growth is strong this would by itself means that the currency will appreciate as the currency is a reflection of the economy and with the continuing growth which might reach excessive levels indicating inflationary pressures the central bank of that country might decide a hike on their key interest rate as a result of that excessive growth in an attempt to control the growth levels in order to keep the economy active this will lead to a further appreciation in that currency as the yield on it will increase making it more attractive for investors to make profits we will notice that the effect will take place immediately; with the expectations for the interest rate to rise and at the time of the release it will not affect the currency as it already took the effect by the time expectations rose unless the news came against expectations then if it's positive news as in this case a hike in interest rate more than that was expected will lead to an appreciation in the currency and if the decision was for an interest rate cut it will lead to a depreciation in the currency.

Yet if you watch the markets closely almost whenever a hike in interest rates happens the stock market will drop but why is that??? It's because there are investors who are looking for these opportunities those investors are called arbitragers when they see a chance like that in the markets they will draw their funds from one market and put it in higher yielding markets as in our previous example they will sell their investments in the stock market to try to capitalize on the interest rate hike expectations investing their money in that currency meaning buying it and making profits by selling the currency later.

We have to determine the level of significance for every indicator as it will lead to projections to other indicators in the economy and based on that we will decide what strategy we will apply in the markets.

Other than economical factors we have a very influencing factor which is the political policies of any country as this might change a lot of the facts around the world, wars, disasters, and trades agreements all accounts for something in the Forex market, Even weather affects the prices.

So in a way or another we have to pay attention to every small detail around as it might have an effect on financial markets; and for that provided is a list of detailed fundamentals released from economies that have their final word on markets.
Adjusted Retail sales (Switzerland) 
ADP Employment Report (United States) 
All Industry Activity Index (Japan) 
Bank of Canada Rate Decision 
Bank of England Inflation Report (United Kingdom) 
Bank of England Minutes (United Kingdom) 
Bank of England Rate Decision (United Kingdom) 
Beige Book (United States) 
Bloomberg Retail PMI ( Euro Zone) 
Bloomberg Retail PMI (Germany) 
BoJ Rate Decision (Japan) 
British Bankers' Association Loans (United Kingdom) 
Building Permits (Canada) 
Business Climate (Euro Zone) 
Business Inventories (United States) 
Capital Spending (Japan) 
CBI Distributive Trades Report (United Kingdom) 
CBI Industrial Trends (United Kingdom)  
Chicago Purchasing Managers Index (United States) 
CIPS PMI Construction (United Kingdom) 
CIPS PMI Manufacturing (United Kingdom) 
CIPS PMI Services (United Kingdom) 
Coincident Index (Japan) 
Construction Orders (Japan) 
Construction Output (Euro Zone) 
Construction Spending (United States) 
Consumer Confidence (Japan) 
Consumer Confidence (United States) 
Consumer Credit (United States) 
Consumer Price Index (Canada) 
Consumer Price Index (Euro Zone) 
Consumer Price Index (Switzerland) 
Consumer Price Index (United Kingdom) 
Consumer Price Index (United States) 
Consumer Price Index EU Harmonized (Germany) 
Consumer Prices Flash Estimate (Euro Zone) 
Current Account (Canada) 
Current Account (Euro Zone) 
Current Account (Germany) 
Current Account (Japan) 
Current Account (United Kingdom)  
Current Account (United States)

from ecpulse.com
Category: Forex for Beginners | Added by: forex-market (2009-09-16)
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