FUNDAMENTAL ANALYSIS

The forces of supply and demand determine the value of currencies. Spec-ulation in the foreign exchange market (the FOREX) must be based on sound analytical principles. There are two radically different methods of forecasting where the forces of supply and demand are heading.


The first method as mentioned earlier is known as fundamental analysis.While I cannot list all the events that move the market, some of them include the forces of currency supply and demand worldwide, fundamental economic data, and political developments.
Unlike in the stock market, fundamental analysis in the FOREX is much more important. Although it is important to watch fundamentals when trading in the stock market, it is much easier to manipulate the data.
After all, where does the fundamental data come from that traders use to make their trading decisions?

Every publicly traded company has to produce 10q’s and 10k’s. These are their quarterly and annual reports, respectively. These reports have to be submitted to the Securities and Exchange Commission (SEC) on time and correct or the companies face fines and penalties. These reports have to go through the SEC for review before they are released to the general public of shareholders.


Does this ring any bells? How about the big problems of Enron, Global Crossing, and all the rest? If companies submit financial reports to the SEC that are not 100 percent accurate, how are you, the investor, supposed to know?


It is pretty hard, and this is exactly what happened at Enron. Investors were trading Enron stock thinking that it was one of the largest companies on the exchange, when, in fact, some of the fundamental data on the company were incorrect. In fact the company was much smaller than investors perceived.
In the FOREX, fundamental analysis has a much bigger emphasis. The fundamental data that I am talking about are usually key economic indicators. When these numbers are released, the various currencies will react.
If the numbers are different from expected, huge moves can take place. These huge moves can make or lose a trader a lot of money, depending on whether the trader is on the right side of the trade and/or the trader has used good money management.
You can see that the forecast is what traders are building into the momentum of the currency. If the actual number comes in higher or lower than that predicted, the currency will react. These reports are used in all countries.

The consumer price index (CPI) is calculated in all countries, some with different names but nonetheless the same type of measurement, and thus it would affect that country’s currency.


When you are trading, be sure to know when the news is coming out. Ultimately, the trend in the currency will prevail, but unexpected news can affect the trend even if only for a very short time. The effect, however, can be enough to stop you out of your trade.


Don’t worry, though; you do not have to know about these forecasts if you don’t want to because there are numerous FOREX alert services out there. These alert services usually charge a monthly fee and will keep you apprised of news and what is anticipated, as well as what to expect if some-thing unanticipated happens.