There are two methods employed by a Forex trader in analyzing a trade, they are fundamental analysis and technical analysis. Some traders base only on technical analysis while some make only the use of fundamental analysis in executing their trades. It is very important that a trader learn and understand the two methods of analysis ; as well apply both in trade executions. Forex trading is not a guess work you need to analyze the market properly using the two method of analysis to ascertain market's movement.
Fundamental analysis deals with those macro-economic factors that can have impact on country's economy and their currency as well. These factors can also be called economic indicators and they reflect the health of a nation's economy. Every nation have Central banks who watch these macro-economic factors in order to make a suitable economic policies.
These indicators are: Interest Rate, Inflation, Non-farm payrolls, Housing starts, Purchasing Managers Index, Gross Domestic Product, Unemployment rate, Retail Sales, Consumer Price Index, Producer Price Index, etc.
News reports are given time to time on these indicators from country to country which Forex traders capitalize on to trade on their releases.
There are resourceful website where you can get information on fundamental trade and analysis like www.forexfactory.com , www.actionforex.com , www.dailyfx.com , www.bloomberg.com ,and visit their economic calendar. This will help you to know before time the economic news to be released, when and the analyst forecast (the market expected number) so that you can plan your trade . When the news comes out better or worst than the market expected number, it can have a great impact in the market up or down.
Forex trading is all about trading nations' currencies. In Forex, people buy currencies from Countries with strong economy and sell currencies from countries with weak economy which are shown by positive or negative released economic indicators. These currencies experiences a demand (buy) when the indicators shows positive data and a supply (sell)on the release of negative economic data.
The only way you can master this method of analysis is by practicing. Try what you have learn here on your demo-account first.
UNDERSTANDING THE ECONOMIC INDICATORS
Interest rate: this is among the market movers on the list of economic indicators. This is fixed by a nation's central bank after watching other economic indicators like inflation. Interest rate is the cost of borrowing fund in a country. When a central banks governor announces a higher interest rate, it shows a positive economy and their currency market will rise but when the interest rate is cut, it can lead to a fall in the currency price. This means that when this news is released and it came out higher than expected (positive report), you should buy their currency and smile for a good trade. Do the opposite on a negative report.
Inflation: this is also one of the drivers of the economy. Central banks watch this indicator to enable them make policies. A rise in inflation shows too much money in economy which can lead to an increase in interest rate while a fall in inflation (deflation) can make the central bank governors to cut rates. From these explanations, you will understand that you need to buy a currency with a rising inflation and sell a currency with a falling inflation.
Non-farm payroll: this indicator is released on first Friday of every month. It shows the number of new jobs created and the percentage of job seekers who fail to get job in the previous month.
Gross domestic product (GDP): this is the total amount of goods and services produced in an economy for a period of time. This economic indicator shows whether the economy is growing or shrinking. When GDP of a country came out with higher figure it shows economic growth and you will need to buy the currency but if it is released with a data lower than the market expectation, sell the currency.
Consumer price index (CPI): this measures an average price paid by consumers on fixed basket of goods and services. Increase in price of consumer goods and services indicates a rising inflation while fall in prices is a falling inflation.
Producer price index (PPI): this measures an average changes in selling prices in the manufacturing sector. Increase in the PPI can lead to increase in CPI.
Retail sales: this measures sale performance in retail stores. Increase in the data released on retail sales shows an active economy and you need to buy the currency while you will be selling at the release of decreasing retail sales.