Ultimately, monetary policy boils down to promoting and maintaining price stability and economic growth. To achieve their goals, central banks use monetary policy mainly to control the following:  the interest rates tied to the cost of money,  the rise in inflation,  the money supply,  reserve requirements over banks,  and discount window lending to commercial banks Types of Monetary Policy Monetary policy can be referred to in a couple different ways.

Contractionary or restrictive monetary policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates.

The idea here is to slow economic growth with the high interest rates. Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses. Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate. The cost of borrowing money goes down in hopes that spending and investment will go up. Accommodative monetary policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates.

Finally, neutral monetary policy intends to neither create growth nor fight inflation. They might not come out and say it specifically, but their monetary policies all operate and focus on reaching this comfort zone. They know that some inflation is a good thing, but out-of-control inflation can remove the confidence people have in their economy, their job, and ultimately, their money.

By having target inflation levels, central banks help market participants better understand how they the central bankers will deal with the current economic landscape. Let's take a look at an example. Back in January of , inflation in the U. shot up to 3. Mervyn King, the governor of the BOE, followed up the report by reassuring people that temporary factors caused the sudden jump, and that the current inflation rate would fall in the near term with minimal action from the BOE.

Whether or not his statements turned out to be true is not the point here. We just want to show that the market is in a better place when it knows why the central bank does or doesn't do something in relation to its target interest rate. Simply put, traders like stability. Central banks like stability. Economies like stability. Knowing that inflation targets exist will help a trader to understand why a central bank does what it does.

Round and Round with Policy Cycles For those of you that follow the U. dollar and economy and that should be all of you! It was the craziest thing to come out of the Fed ever, and the financial world was in an uproar! Wait, you don't remember this happening? It was all over the media. Petroleum prices went through the roof and milk was priced like gold. You must have been sleeping! Oh wait, we were just pulling your leg! We just wanted to make sure you were still awake.

Monetary policy would never dramatically change like that. Most policy changes are made in small, incremental adjustments because the bigwigs at the central banks would have utter chaos on their hands if interest rates changed too radically.

Just the idea of something like happening would disrupt not only the individual trader, but the economy as a whole. That's why we normally see interest rate changes of. Again, remember that central banks want price stability, not shock and awe. Part of this stability comes with the amount of time needed to make these interest rate changes happen. It can take several months to even several years. Just like traders who collect and study data to make their next move, central bankers do a similar job, but they have to focus their decision-making with the entire economy in mind, not just a single trade.

Interest rate hikes can be like stepping on the accelerator while interest rate cuts can be like hitting the brakes, but bear in mind that consumers and business react a little more slowly to these changes.

This lag time between the change in monetary policy and the actual effect on the economy can take one to two years. The Who's Who of the Central Bank We just learned that currency prices are affected a great deal by changes in a country's interest rates. We now know that interest rates are ultimately affected by a central bank's view on the economy and price stability, which influence monetary policy.

Central banks operate like most other businesses in that they have a leader, a president or a chairman. It's that individual's role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Steve Jobs or Michael Dell steps to the microphone, everyone listens. Using the Complex conjugate root theorem, the answer is yes! Yes, it's important to know what's coming down the road regarding potential monetary policy changes.

And lucky for you, central banks are getting better at communicating with the market. Whether you actually understand what they're saying, well that's a different story. So the next time Ben Bernanke or Jean-Claude Trichet are giving speeches, keep your ears open. Better yet, use the trusty BabyPips. com Economic Calendar to prepare yourself before the actual speech. While the central bank Chairman isn't the only one making monetary policy decisions for a country or economy, what he or she has to say is only not ignored, but revered like the gospel.

Okay, maybe that was a bit dramatic, but you get the point. Not all central bank officials carry the same weight. Central bank speeches have a way of inciting a market response, so watch for quick movement following an announcement. Speeches can include anything from changes increases, decreases or holds to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes.

But don't despair if you can't tune in to the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public. Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved.

Much like how the market reacts to the release of other economic reports or indicators, currency traders react more to central bank activity and interest rate changes when they don't fall in line with current market expectation. It's getting easier to foresee how a monetary policy will develop over time, due to an increasing transparency by central banks.

Yet there's always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected. It's during these times that marketing volatility is high and care should be taken with existing and new trade positions.

Los Angeles Hawks vs. the New York Doves Yes, you're in the right place. Tonight's match puts the L. Hawks up against the N. You're in for a treat. Wait, what?! Whoops sorry, wrong subject. We really just meant hawks versus doves, central bank hawks versus central bank doves that is. Central bankers can be viewed as either hawkish or dovish, depending on how they approach certain economic situations.

Central bankers are described as "hawkish" when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment. For example, "The Bank of England suggests the existence of a threat of high inflation. Dovish central bankers, on the other hand, generally favor economic growth and employment over tightening interest rates. They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action.

And the winner is It's a tie! Well, sort of. You'll find many a banker "on the fence", exhibiting both hawkish and dovish tendencies. However, true colors tend to shine when extreme market conditions occur.

Long-term Market Movers There are several fundamentals that help shape the long term strength or weakness of the major currencies. We've included what we think are the most important, for your reading pleasure: Economic Growth and Outlook We start easy with the economy and outlook held by consumers, businesses and the governments.

It's easy to understand that when consumers perceive a strong economy, they feel happy and safe, and they spend money. Companies willingly take this money and say, "Hey, we're making money! uh, what do we do with all this money? And all this creates some healthy tax revenue for the government.

They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy. But you get the idea. Both positive and negative economic outlooks can have a direct effect on the currency markets.

Capital Flows Globalization, technology advances and the internet have all contributed to the ease of investing your money virtually anywhere in the world, regardless of where you call home.

You're only a few clicks of the mouse away or a phone call for you folks living in the Jurassic era of the 's from investing in the New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U. dollars, euros, yen, and even exotic currencies.

Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and selling. The important thing you want to keep track of is capital flow balance, which can be positive or negative. When a country has a positive capital flow balance, foreign investments coming into the country are greater than investments heading out of the country. A negative capital flow balance is the direct opposite.

Investments leaving the country for some foreign destination are greater than investments coming in. With more investment coming into a country, demand increases for that country's currency as foreign investors have to sell their currency in order to buy the local currency.

This demand causes the currency to increase in value. Simple supply and demand. And you guessed it, if supply is high for a currency or demand is weak , the currency tends to lose value. When foreign investments make an about-face, and domestic investors also wants to switch teams and leave, and then you have an abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they're investing in.

Foreign capital love nothing more than a country with high interest rates and strong economic growth. If a country also has a growing domestic financial market, even better! A booming stock market, high interest rates What's not to love?!

Foreign investment comes streaming in. And again, as demand for the local currency increases, so does its value. Countries sell their own goods to countries that want them exporting , while at the same time buying goods they want from other countries importing. Have a look around your house. Most of the stuff electronics, clothing, doggie toys lying around are probably made outside of the country you live in.

Every time you buy something, you have to give up some of your hard-earned cash. Whoever you buy your widget from has to do the same thing. importers exchange money with Chinese exporters when they buy goods.

And Chinese imports exchange money with European exporters when they buy goods. All this buying and selling is accompanied by the exchange of money, which in turn changes the flow of currency into and out of a country. Trade balance or balance of trade or net exports measures the ratio of exports to imports for a given economy.

It demonstrates the demand of that country's good and services, and ultimately it's currency as well. If exports are higher than imports, a trade surplus exists and the trade balance is positive. If imports are higher than exports, a trade deficit exists, and the trade balance is negative. Net importers first have to sell their currency in order to buy the currency of the foreign merchant who's selling the goods they want.

When there's a trade deficit, the local currency is being sold to buy foreign goods. Because of that, the currency of a country with a trade deficit is less in demand compared to the currency of a country with a trade surplus. Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods. It's all due to the demand of the currency.

Currencies in higher demand tend to be valued higher than those in less demand. It's similar to pop stars. Because she's more in demand, Lady Gaga gets paid more than Britney Spears.

Same thing with Justin Bieber versus Vanilla Ice. The Government: Present and Future The years and have definitely been the years where more eyes were glaringly watching their respective country's governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets.

Instability in the current government or changes to the current administration can have a direct bearing on that country's economy and even neighboring nations. And any impact to an economy will most likely affect exchange rates. That's right! No wonder you're here to get some education! There's just way too much information to try to process and way too many things to confuse any newbie trader. That's some insane information overload if we've ever seen it.

But information is king when it comes to making successful trades. Price moves because of all of this information: economic reports, a new central bank chairperson, and interest rate changes. News moves fundamentals and fundamentals move currency pairs! It's your goal to make successful trades and that becomes a lot easier when you know why price is moving that way it is. Successful traders weren't born successful; they were taught or they learned.

Successful traders don't have mystical powers well, except for Pipcrawler, but he's more weird than he is mystical and they can't see the future. What they can do is see through the blur that is forex news and data, pick what's important to traders at the moment, and make the right trading decisions.

Where to Go for Market Information Market news and data is made available to you through a multitude of sources. The internet is the obvious winner in our book, as it provides a wealth of options, at the speed of light, directly to your screen, with access from almost anywhere in the world. But don't forget about print media and the good old tube sitting in your living room or kitchen.

Individual traders will be amazed at the sheer number of currency-specific websites, services, and TV programming available to them. Most of them are free of charge, while you may have to pay for some of the others. Let's go over our favorites to help you get started. Websites Our top pick of a forex news-specific website is FreshPips. Make a mental note that the name of the website is eerily similar to the one you're currently on.

Oh wait, FreshPips. com is just another apple out of the basket of "Pips. com" websites see all of them here. We're not ashamed about promoting FreshPips. Put on this planet to help you unearth and share interesting and useful forex news and research, handpicked from the web by forex traders, from the biggest news sites to little known blogs, FreshPips. com reveals the finest materials as voted on by our users to help you become a smarter forex trader. It covers the areas of analysis, commentary, economic indicators, psychology, and specific currencies.

Traditional Financial News Sources While there are tons of financial news resources out there, we advise you to stick with the big names. These guys provide around-the-clock coverage of the markets, with daily updates on the big news that you need to be aware of, such as central bank announcements, economic report releases and analysis, etc.

Many of these big players also have institutional contacts that provide explanations about the current events of the day to the viewing public.

Financial TV networks exist 24 hours a day, seven days a week to provide you up-to-the-minute action on all of the world's financial markets. In the U. You could even throw a little BBC in there.

Another option for real-time data comes from your trading platform. Many brokers include live newsfeeds directly in their software to give you easy and immediate access to events and news of the currency market.

Check your broker for availability of such features not all brokers features are created equally. It's all possible with an economic calendar. The good ones let you look at different months and years, let you sort by currency, and let you assign your local time zone. Yes, economic events and data reports take place more frequently than most people can keep up with.

This data has the potential to move markets in the short term and accelerate the movement of currency pairs you might be watching. Lucky for you, most economic news that's important to forex traders is scheduled several months in advance.

So which calendar do we recommend? We look no further than our very own BabyPips. com forex Economic Calendar to provide all that goodness! If you don't like ours which we highly doubt , a simple Yahoogleing search will offer up a nice collection for you to examine.

Market Information Tips Keep in mind the timeliness of the reports you read. A lot of this stuff has already occurred and the market has already adjusted prices to take the report into account. If the market has already made its move, you might have to adjust your thinking and current strategy.

Keep tabs on just how old this news is or you'll find yourself "yesterday's news. Economic data rumors do exist, and they can occur minutes to several hours before a scheduled release of data. The rumors help to produce some short-term trader action, and they can sometimes also have a lasting effect on market sentiment. Institutional traders are also often rumored to be behind large moves, but it's hard to know the truth with a decentralized market like spot forex.

There's never a simple way of verifying the truth. Your job as a trader is to create a good trading plan and quickly react to such news about rumors, after they've been proven true or false.

Having a well-rounded risk management plan in this case could save you some moolah! And the final tip: Know who is reporting the news. Are we talking analysts or economists, economist or the owner of the newest forex blog on the block?

Maybe a central bank analyst? The more reading and watching you do of forex news and media, the more finance and currency professionals you'll be exposed to. Are they offering merely an opinion or a stated fact based on recently released data? The more you know about the "Who", the better off you will be in understanding how accurate the news is. Those who report the news often have their own agenda and have their own strengths and weaknesses.

Get to know the people that "know", so YOU "know". Can you dig it? Market Reaction There's no one "All in" or "Bet the Farm" formula for success when it comes to predicting how the market will react to data reports or market events or even why it reacts the way it does. You can draw on the fact that there's usually an initial response, which is usually short-lived, but full of action. Later on comes the second reaction, where traders have had some time to reflect on the implications of the news or report on the current market.

It's at this point when the market decides if the news release went along with or against the existing expectation, and if it reacted accordingly. Was the outcome of the report expected or not? And what does the initial response of the market tell us about the bigger picture? Answering those questions gives us place to start interpreting the ensuing price action. Consensus Expectations A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts.

Economic forecasts are made by various leading economists from banks, financial institutions and other securities related entities. Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound "players" in the market. All the forecasts get pooled together and averaged out, and it's these averages that appear on charts and calendars designating the level of expectation for that report or event.

The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number. Incoming data normally gets identified in the following manner:  "As expected" - the reported data was close to or at the consensus forecast. Whether or not incoming data meets consensus is an important evaluation for determining price action. Just as important is the determination of how much better or worse the actual data is to the consensus forecast.

Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out. However, let's remember that forex traders are smart, and can be ahead of the curve. Well the good ones, anyway. Many currency traders have already "priced in" consensus expectations into their trading and into the market well before the report is scheduled, let alone released. As the name implies, pricing in refers to traders having a view on the outcome of an event and placing bets on it before the news comes out.

The more likely a report is to shift the price, the sooner traders will price in consensus expectations. How can you tell if this is the case with the current market? Well, that's a tough one. You can't always tell, so you have to take it upon yourself to stay on top of what the market commentary is saying and what price action is doing before a report gets released. This will give you an idea as to how much the market has priced in.

A lot can happen before a report is released, so keep your eyes and ears peeled. Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend. There is always the possibility that a data report totally misses expectations, so don't bet the farm away on the expectations of others.

When the miss occurs, you'll be sure to see price movement occur. Help yourself out for such an event by anticipating it and other possible outcomes to happen. Play the "what if" game.

Ask yourself, "What if A happens? What if B happens? How will traders react or change their bets? What if the report comes in under expectation by half a percent?

How many pips down will price move? What would need to happen with this report that could cause a 40 pip drop? Come up with your different scenarios and be prepared to react to the market's reaction.

Being proactive in this manner will keep you ahead of the game. What the Deuce? They Revised the Data? Now what? Too many questions in that title. But that's right, economic data can and will get revised. That's just how economic reports roll! Let's take the monthly Non-Farm Payroll employment numbers NFP as an example. As stated, this report comes out monthly, usually included with it are revisions of the previous month's numbers. We'll assume that the U. economy is in a slump and January's NFP figure decreases by 50,, which is the number of jobs lost.

It's now February, and NFP is expected to decrease by another 35, But the incoming NFP actually decreases by only 12,, which is totally unexpected. Also, January's revised data, which appears in the February report, was revised upwards to show only a 20, decrease.

As a trader you have to be aware of situations like this when data is revised. Not having known that January data was revised, you might have a negative reaction to an additional 12, jobs lost in February. That's still two months of decreases in employment, which ain't good.

However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point.

The state of employment now looks totally different when you look at incoming data AND last month's revised data. Be sure not only to determine if revised data exists, but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases. Revisions can help to affirm a possibly trend change or no change at all, so be aware of what's been released.

Market Sentiment The market has feelings too, you know. Get ready to learn all about market sentiment! Lessons in Market Sentiment 1. What is Market Sentiment Every trader has his own opinion about the market.

The combined feeling that market participants have, that's what you call market sentiment, young Padawan. Commitment of Traders Report Gauging market sentiment may not be as difficult as you think. The Commitment of Traders COT report can be a clue on whether the market is bearish or bullish. How do you get a hold of the COT report? It's as easy as , baby! Understanding the Three Groups Meet the different playas in the futures trading field: hedgers, large speculators, and small speculators!

The COT Trading Strategy Yeah, we know. The COT report looks like a giant gobbled-up block of text. But don't fret! There's actually a pretty simple way to use it. Picking Tops and Bottoms When the market sentiment shifts, should you go with the speculators or the hedgers? Your Very Own COT Indicator Studying the School of Pipsology is about to get sweeter!

Are you ready to create your very own COT indicator? Getting Down and Dirty with the Numbers Put your thinking caps on because we're gonna get down and dirty with the numbers to calculate for the percentage of speculative positions! What is Market Sentiment How's Mr.

Market Feeling? Every trader will always have an opinion about the market. I'm pretty bullish on the markets right now. When trading, traders express this view in whatever trade he takes.

But sometimes, no matter how convinced a trader is that the markets will move in a particular direction, and no matter how pretty all the trend lines line up, the trader may still end up losing. A trader must realize that the overall market is a combination of all the views, ideas and opinions of all the participants in the market.

That's right This combined feeling that market participants have is what we call market sentiment. It is the dominating emotion or idea that the majority of the market feels best explains the current direction of the market. How to Develop a Sentiment-Based Approach As a trader, it is your job to gauge what the market is feeling.

Are the indicators pointing towards bullish conditions? Are traders bearish on the economy? We can't tell the market what we think it should do.

But what we can do is react in response to what is happening in the markets. Note that using the market sentiment approach doesn't give a precise entry and exit for each trade. But don't despair! Having a sentiment-based approach can help you decide whether you should go with the flow or not.

Of course, you can always combine market sentiment analysis with technical and fundamental analysis to come up with better trade ideas. In stocks and options, traders can look at volume traded as an indicator of sentiment. If a stock price has been rising, but volume is declining, it may signal that the market is overbought. Or if a declining stock suddenly reversed on high volume, it means the market sentiment may have changed from bearish to bullish. Unfortunately, since the foreign exchange market is traded over-the-counter, it doesn't have a centralized market.

This means that the volume of each currency traded cannot be easily measured. OH NOOOO!!!! Without any tools to measure volume, how can a trader measure market sentiment?! This is where the Commitment of Traders report comes in!

Commitment of Traders Report The COT Report: What, Where, When, Why, and How The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report COT every Friday, around pm EST. Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market.

Later on, we'll let you meet these market players. These are the hedgers, large speculators, and retail traders. Just like players in a team sport, each group has its unique characteristics and roles. By watching the behavior of these players, you'll be able to foresee incoming changes in market sentiment. You're probably asking yourself, "Why the heck do I need to use data from the FX futures market? Activity in the futures market doesn't involve me. So what's the closest thing we can get our hands on to see the state of the market and how the big players are moving their money?

Yep, you got it The Commitment of Traders report from the futures market. Before going into using the Commitment of Traders report in your trading strategy, you have to first know WHERE to go to get the COT report and HOW to read it. htm Step 2: Once the page has loaded, scroll down a couple of pages to the "Current Legacy Report" and click on "Short Format" under "Futures Only" on the "Chicago Mercantile Exchange" row to access the most recent COT report.

Step 3: It may seem a little intimidating at first because it looks like a big giant gobbled-up block of text but with a little bit of effort, you can find exactly what you're looking for. To find the British Pound Sterling, or GBP, for example, just search up "Pound Sterling" and you'll be taken directly to a section that looks something like this: Yowza! What the heck is this?! We'll explain each category below.

For the most part, these are traders who looking to trade for speculative gains. In other words, these are traders just like you who are in it for the Benjamins! If you want to access all available historical data, you can view it here. You can see a lot of things in the report but you don't have to memorize all of it. As a budding trader, you'll only be focusing on answering the basic question: "Wat da dilly on da market yo?! These players could be categorized into three basic groups: 1.

Commercial traders Hedgers 2. Non-commercial traders Large Speculators 3. Retail traders Small Speculators Don't Skip the Commercial - The Hedgers Hedgers or commercial traders are those who want to protect themselves against unexpected price movements.

Agricultural producers or farmers who want to hedge minimize their risk in changing commodity prices are part of this group. Fundamental analysis is a way of analysing financial markets. The Forex trader studies economic data and news.

It focuses on the general state of the economy. This includes interest rates, employment levels, GDP, international trade and manufacturing. Then you look at the relative impact on the national currency concerned. Technical analysis is about studying the charts, observing price action. Quite often, the price of a currency may differ from its real value. Sometimes, the market may misprice a currency in the short-term. The belief is, regardless of market price, it will always return to the correct price.

Fundamental analysis can help you to figure out what the true value of a currency might be. This may be different from the current price on the market. Some traders rely on fundamental analysis to predict future price movement. Other traders use it in combination with technical analysis. Instead of wondering why a currency pair is moving in a particular direction, you have more of an idea about WHY. This can give you a nice advantage. Technical analysis which is the subject for the next chapter only focuses on price.

It considers no other factors. Fundamental analysis researches everything but the current price. Fundamental analysis is rarely a good choice for short-term traders.

If you are scalping the market you are unlikely to reap the rewards of a longer-term strategy. Fundamental analysis is often used by traders who play the long game. These are Forex traders holding trades for longer than a day. Some traders hold trades for days, weeks or even months. Fundamental analysis is a logical form of assessing where price movement may head off to. How you analyse this is what we are going to discuss in this chapter.

Unemployment levels always affect the levels of demand for its currency. It's logical, isn't it? If the future economic outlook is good, the currency should gain strength.

If the future economic outlook is not so good, then the currency rate will fall. A strong economy encourages investment from businesses and investors. To invest, buyers have to convert their money into the currency of the country concerned. Buying more of the currency further pushes the demand and price continues to rise. It also sounds like common sense logic. Before you rush off to become a fundamental Forex trader , let's look at some anomalies to factor in.

The truth is, sometimes healthy economies show weakening currencies. Why is that? Well, trading currencies are different from trading the stock of a company. Currencies do not always reflect the health of the economy. As we mentioned earlier in the course, sometimes it is in the interest of a country to have lower currency rates.

So, even if the country has a growing economy, it may seek to push the price down. This is where market makers and central banks may manipulate the price. We discussed this in earlier chapters. The British economy has been improving and the price reflects buying confidence.

As the British economy continues to improve, the UK may need to raise interest rates. This is a way to control growth and inflation. Higher interest rates make the pound more attractive to investors. As investors buy the pound, price increases further. Demand rises for the currency.

The value of the pound will likely increase against other countries with less demand. Fundamental analysis is about understanding economic, financial and political news. Then working out how it impacts currency rates. It seems like hard work. All you need to know is how to assess probabilities. News reports can have a significant impact on the Forex market. They can cause substantial moves and fast spikes in price action. Some news reports are weekly.

Others release monthly or quarterly. One essential tool for the fundamental trader is a Forex news calendar. We will be discussing economic calendars in chapter As a Forex trader, you need to know the news schedule, so you can plan for potential trades.

With technical analysis, the Forex trader analyses price data every second. Shane first starting working with The Tokenist in September of — and has happily stuck around ever since.

Originally from Maine, All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

For many of us, moods can be predicted by a few important factors. Getting enough sleep. A good, hot meal. Financial security. Time with loved ones. If you understand these factors, you can make better predictions about how your investment might fare—just like you know how to predict that your uncle will get real cranky if you take him to a three-hour movie without going to lunch first. The collection of factors that impact currency prices create forex fundamental analysis.

This guide will help you understand what fundamental analysis is, what factors you need to understand, the limitations of fundamental analysis, and how to get started. Technical analysis will have you spending time with all those wiggly charts that traders are such big fans of. While different financial markets will have their own time zones and unique differences, you can basically apply the same technical analysis tools to stocks or forex.

Fundamental analysis differs more between the stock and forex markets, but both still rely on the principle of supply and demand. For example, the British pound GBP is one of the major currencies. When the British economy improves, the GBP becomes stronger. This might cause the Bank of England to raise interest rates, in an effort to control this growth.

Higher interest rates add value to assets controlled by GBP, which in turn raises demand for GBP—causing it to become even stronger.

Currencies can even change value based on expectations, such as the dollar falling from month highs in anticipation of the Fed raising rates. This gives a general sense of how fundamental analysis works in the forex market, and you can see how learning to read economic and political news is a crucial part of learning forex. Most forex strategies will recommend that you keep an eye on political and economic news in your targeted nations, but fundamental analysis helps you understand currency value on a deeper level.

These factors can be understood through world news, economic reports, the actions of central banks, and more. These include unemployment numbers, housing statistics, and more. GDP tells you the total market value of all the goods and services a nation produced that year.

While many see GDP as the broadest way to view an economy, it is also a lagging indicator, because it is only released once a year and thus does not give a snapshot of where an economy is in the current moment. Before the final annual GDP is released, there are two reports: the advance report and the preliminary report. The reports are likely to stir up some volatility in the market, especially as they often offer different numbers.

The industrial production report specifically shares changes in production of factories, utilities, and mines.

Utility production can be more volatile as it is impacted by weather and other factors. For example, after news about huge floods that devastated farms in China in November dropped, we saw a spike in the value of the USD over the CNH.

The retail sales report, as the name suggests, measures total sales from all retail stores in the country.

edu no longer supports Internet Explorer. To browse Academia. edu and the wider internet faster and more securely, please take a few seconds to upgrade your browser. Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of an asset. If you think about it, this makes a whole lot of sense! Just like in your Economics class, it is supply and demand that determines price. Log in with Facebook Log in with Google.

Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. Forex Fundamental analysis. Darren Chia. Continue Reading Download Free PDF. Content Page no. Fundamental Analysis. Interest Rates Long-term Market Movers.

News and Market Data. Market Reaction. Market Sentiment. Commitment of Traders Report. Trading the News. Carry Trade. The US Dollar Index. Inter-market Correlations. Gold Correlation. Bonds Correlation. Bond Spreads. Bond Markets, Fixed Income Securities, and the Forex Market. Global Equity Markets to Trade FX. The Relationship Between Stocks and Forex. Correlation Between Stocks and Currencies. Inter-market Analysis Cheat Sheet.

Country Profiles and Major Economies. United States of America. Euro Zone. United Kingdom. New Zealand. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all the factors that affect supply and demand. In other words, you have to look at different factors to determine whose economy is rockin' like a Taylor Swift song, and whose economy sucks.

You have to understand the reasons of why and how certain events like an increase in unemployment affect a country's economy, and ultimately, the level of demand for its currency. The idea behind this type of analysis is that if a country's current or future economic outlook is good, their currency should strengthen.

The better shape a country's economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country's currency to obtain those assets. In a nutshell, this is what fundamental analysis is: For example, let's say that the U.

dollar has been gaining strength because the U. economy is improving. As the economy gets better, raising interest rates may be needed to control growth and inflation. Higher interest rates make dollar-denominated financial assets more attractive. In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the dollar will increase. Later on in the course, you will learn which economic data drives currency prices, and why they do so.

You will know who the Fed Chairman is and how retail sales data reflects the economy. You'll be spitting out interest rates like baseball statistics. But that's for another lesson for another time. For now, just know that the fundamental analysis is a way of analyzing a currency through the strength or weakness of that country's economy.

It's going to be awesome, we promise! Fundamental Analysis We already touched upon fundamental analysis in Kindergarten. Now it's time to dig a little deeper! Lessons in Fundamental Analysis 1. What is Fundamental Analysis? If you like analyzing social, economic, and political factors that affect supply and demand, fundamental analysis is for you!

Interest Rates Interest rates changes are one of the biggest fundamental catalyts out there. Heck, you could even say that they make the forex world go 'round! The Who's Who of the Central Bank Central banks are like puppeteers. They have full control over monetary policies and their words can move markets in an instant. Long-term Market Movers As with personal relationships, it's important to consider long-term factors in trading. They may hold the key to your happiness! News and Market Data In forex trading, you've got to keep up to date with the latest news and market data to stay alive.

Be in the know by checking out these market info tools! Market Reaction A super duper important report just came out Now what?! Along your travels, you've undoubtedly come across Gulliver, Frodo, and the topic of fundamental analysis. Wait a minute We've already given you a teaser about fundamental analysis during Kindergarten! Now let's get to the nitty-gritty! What is it exactly and will I need to use it? Well, fundamental analysis is the study of fundamentals! That was easy, wasn't it?

There's really more to it than that. Soooo much more. Whenever you hear people mention fundamentals, they're really talking about the economic fundamentals of a currency's host country or economy. Economic fundamentals cover a vast collection of information - whether in the form of economic, political or environmental reports, data, announcements or events.

Fundamental analysis is the use and study of these factors to forecast future price movements of currencies. It is the study of what's going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements such as the growth of the economy, inflation, unemployment affect whatever we're trading.

Fundamental Data and Its Many Forms In particular, fundamental analysis provides insight into how price action "should" or may react to a certain economic event. Fundamental data takes shape in many different forms. It can appear as a report released by the Fed on U. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.

The release of this data to the public often changes the economic landscape or better yet, the economic mindset , creating a reaction from investors and speculators. There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals. Speculations of interest rate hikes can be "priced in" hours or even days before the actual interest rate statement.

In fact, currency pairs have been known to sometimes move pips just moments before major economic news, making for a profitable time to trade for the brave. That's why many traders are often on their toes prior to certain economic releases and you should be too! Generally, economic indicators make up a large portion of data used in fundamental analysis.

Luckily for you, we've got Pip Diddy and Forex Gump to help explain what effect each report can have on the forex market. On the other hand, if a country's economic prospects aren't looking too good, then nobody will be prepared to take on the currency if they think the central bank will have to lower interest rates to help their economy. Short-term forex traders will likely prefer technical analysis. By having target inflation levels, central banks help market participants better understand how they the central bankers will deal with the current economic landscape. This is the first Friday of the month. Dollar Index: First, notice that the index is calculated 24 hours a day, five days a week. Commercial traders Hedgers 2.

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