What Is Fundamental Analysis and How Is It Applied in Forex?


September 17, 2021, | AtoZ Markets-Fundamental analysis is a method used to evaluate the value of a currency. It also serves to analyze the factors that could influence the price in the future. This type of analysis is based on the evaluation of assets based on external events and influences, as well as financial variables and global trends that impact a currency.

Fundamental analysis is one of the two main methods used to analyze the market. The other is technical analysis.

While investors using technical analysis get all the information they need to trade from charts, those relying on fundamental analysis look at external factors, unrelated to the price movements of the asset itself.

It is considered that a good trader should use both types of analysis to improve trading performance. Also, in fundamental analysis, the relationship between supply and demand for currencies is very important.

Factors Determining the Money Supply

These are the main factors affecting the money supply in the financial markets:

  • The amount of money in circulation that exists at any given time and that can be regulated by the monetary authorities or central banks.
  • The availability of people to save once their needs have been met, which depends on the volume of income they receive, that is, the proportion of income destined for savings.
  • The interest rate offered by banking institutions to depositors, which is deposit rates.
  • The situation of the total economy of the country, if there is growth or stagnation.
  • Price fluctuations, if there is stability or inflation.
  • The type of monetary policy established by the state can generate confidence or mistrust in savers.

Factors That Influence the Money Demand

money demand

There are 3 main reasons why people demand money:

  • THE TRANSACTION MOTIVE: Refers to the use of money as a medium of exchange for ordinary transactions, such as the purchase of raw materials, the payment of rents and salaries, the payment of dividends, etc.
  • THE PRECAUTIONARY MOTIVE: To have money arises from the need to face unforeseen emergencies that will cause greater disbursements than those involved in the usually anticipated transactions.
  • THE SPECULATION MOTIVE: It is the attempt to obtain a profit by knowing better the market and what the future will bring.

An important note:

As with the price of any commodity, the exchange rate goes up or down depending on supply and demand. When supply is greater than demand (dollars are abundant in the market and few buyers) the exchange rate goes down.  On the other hand, when there is less supply than demand (there is a shortage of dollars and many buyers), the exchange rate goes up.

Who Bid and Ask in the Forex Market?

  1. Non-financial companies: (exporters, importers, etc.) or tourists, immigrants, investors, etc.
  2. Exchange brokers: are the subjects used by Commercial Banks to influence banking activities.
  3. Multinational or investment companies: they carry out their transactions based on what has been called vehicular currency.
  4. Commercial banks act as intermediaries between suppliers and demanders of foreign currencies.
  5. Central banks: not only the exchange rate depends on them, but also the exchange regime or system as a whole, i.e. they are the ones that determine the exchange rates, modifying the income in dollars, converting them into national currency.

How Do Forex Quotes Work?

How to Use Fundamental Analysis for Our Trading?

  • At the beginning of each trading week, review the main news that will set the market’s direction.
  • Review the stock market session before the one you will be trading and define the market sentiment for that session.
  • Read the economic reports presented and be clear about the release schedule with your platform.
  • Check if the publication presented in the calendar contains lagging information or keeps pace with the market.
  • Look for moments in the market where technical analysis and fundamental analysis converge to look for new price zones.
  • Establish the sociology of the market.

Remember always to have a clear market scenario before starting each trading day. Fundamental analysis is a great tool for any trader in the forex market.

Fundamental analysis allows traders to understand and observe in a more global way what is happening in the world’s financial markets.

 

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