Predicting Forex Trends Using Economic Fundamentals

When analyzing data to predict price movements in Forex trading there are essentially two different methods. One involves technical analysis, which is where you study charts and price actions to track trends. Fundamental analysis is used to determine the reason why those trends happened in the first place.

Once you learn those fundamentals that make the market move and cause currencies to suddenly change direction, you can read economic reports about the nations whose currencies you trade the most and get a good indication of which way their money is about to move.

What Makes the Forex Market Move?

Economics, politics and social factors are all at play when it comes to trying to predict the movement of currency. Most fundamental analysts of Forex trading focus their attention on the economic news that is affecting currency. There are three main components that they look for to base their trade predictions on:

• Growth – By looking at a country’s Gross Domestic Product you can get a clear view of how its economy is doing. When a nation’s economy is growing the currency is as well. As this continues, that currency will become stronger than others.
• Trade – Currency is directly affected by the country’s current account balance and trade. When there is a surplus of goods available the economy is thriving and along with it the value of its currency.
• Rates – Traders seek out the currency of countries which have a high interest rate. Higher rates traditionally attract more investments which in turn will drive the value upwards. This applies to both short and long term rates.

These three factors contribute heavily to the overall economy of a country. When analyzed as a group, seasoned investors are able to make accurate predictions about their currency pairs based on the state of the economy.

The Economic Calendar

Understanding why the market is moving in a particular direction and learning how to predict those moves is very beneficial to your Forex trading success. Currency is very sensitive to global economics, which can cause the market to fluctuate rapidly. Trying to analyze what triggers these fluctuations will allow you to predict those movements. If you are able to stay one step ahead of these movements by correctly foreseeing the events that will change them, you have the opportunity to increase your overall success and begin to build wealth.

The economic calendar is one of the easiest ways that you can track these economic changes. It helps you narrow in on those key indicators so that you can see what is going to have an impact on your currency pairs. A real time economic calendar will give you an overview of how news and economic events are affecting currency trends. Most brokers will post one on their website for their trading customers use.

You can create your own calendar by reading reports and searching for indicative information online. Once you obtain what you feel is relevant information, you input it into your calendar and begin to track. Make note of when an important announcement is to be made and look for signs of what it will contain. You can than plan accordingly and begin to plan your trades to enter them just before the announcement is official and the currency begins to react.

For example, when introducing fundamental analysis to a new trader I will focus on the Consumer Confidence Index, or CCI. This is a report released the morning of the last Tuesday of each month that focuses on the U.S. economy and how consumers perceive it. Since there are other indicators that can help forecast what this report will reveal, such as retail sales and unemployment rates, it is relatively easy to predict what the American people are going to have to say about the state of their economy.

If high retail sales and low unemployment rates are observed, it can be considered safe to assume that the American people are going to feel positively about their economy. Therefore, once that report is released, the value of the U.S. dollar is going to increase. Since my new trader and I have already predicted this news based on the other indicators, we can enter the trade before the release date, planning on the strength of the U.S. dollar to grow. Not only are we then able to buy at a lower price, the release of the report Tuesday morning is going to rapidly push the currency upwards and our profit with it.

While seemingly complicated at first, fundamental analysis becomes easier as your experience grows. You will begin to notice that certain reports have more of an impact on different currencies, allowing you to focus attention there. You will also begin to anticipate those reports that have historically made an impact on the currency pairs you trade the most. As your knowledge of these indicators grows, your predictions will become more accurate.

Once you learn how to combine your fundamental analysis with your technical ones you will begin to be able to advance your trading skills. Tracking trends is the heart of Forex trading, and fundamental analysis alerts you to when one is about to start, while your technical analysis helps you decide where to enter and exit.

Casey Stubbs is the founder of WinnersEdgeTrading.com which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.