The Fundamentals of Forex Trading

As a Forex Trader, not only do you have to be smart and business savvy, but also understand the science and math of Forex Trading.

Because the Forex Market is so liquid (almost 3 trillion dollars are traded everyday) and because it is open 24 hours a day, 5 days a week, Forex Trading requires a good understanding of global market dynamics, and sound grasp of what's happening in the world.

Forex Traders

Forex Traders typically spend a few hours every day sourcing information, consulting with forex brokers, and referring to bars, charts and graphs to help make correct decisions.

So exactly what are they're looking for?

What they're essentially looking for is how well an economy is doing. The economy of a country has a direct bearing on the value of a currency (the interest one gets on it), and since that's what a trader deals in, it directly affects his decisions to sell or buy currency. This is called as 'Fundamental Analysis' and is a strategy used by many dealers. The idea is to buy currency when an economy seems to be on its way up, and sell it, when it's on the downward.

While it isn't possible for one to track every economy, the basic idea is to keep track of economies of currencies that are popularly traded and of high value: USD, EUR, GBP, JPY, CHF, CAD, NZD, AUD.

Fundamental Analysis

Fundamental analysis requires you to keep track of the following:

Political changes in the country's economy. This would include changes in the government, elections, policies (especially trading and fiscal policies), war (including civil and political unrest) These factors directly impact an economy.

Data on GDP of a country for the past few years. This, coupled with other information like per capita income, purchasing power parity and other financial statistics of the economy, give you an idea of which direction the economy is heading. All of this data is easily available off the internet.

Natural disasters, pandemic diseases, terrorist attacks and other disturbing events also have a direct bearing on a country's economy, since they make any kind of economic activity impossible.

It is important to understand that all these factors are not independent of each other, and as a Forex trader, you need to take a 'combined picture' of them all and know where the economy is NOW to understand where it WILL BE in the future. Another important aspect of Fx Trading fundamentals is Technical Analysis. You can learn more about Forex Technical Analysis here.