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If you want to be a smart trader, you have to be able
to analyze the market correctly and predict what the price movement is going
to be. This is true no matter what you are trading, whether it be stocks,
commodities, bonds, currency or any other form of security.
This type of analysis can be done in two different ways, with fundamental
analysis or technical analysis.
With technical analysis, you study the prices. Your goal is to analyze the
history of the price movements in order to try to predict future prices.
Fundamental analysis, the other hand, is the study of one nation's overall
economic health. You might also think of this as "big picture" analysis.
This focus is on the idea that the health of a nation's economy will affect
both the supply and demand for its currency. In turn, this will affect the
price of the currency itself.
As example, if the US economy's health is good and its economy is on the
rise, one would expect that the value of US dollar will also rise and
currency traders will want to invest heavily in it. This type of "bullish"
behavior becomes a self-filling prophecy so that the US dollar does, indeed,
rise in value.
Although it seems like a pretty simple concept, in fact, judging the
"health" of a nation is not easy. There are many factors to be considered.
Therefore, two traders may look at the same figures and interpret the data
in different ways.
Fundamental analysts look at various economic indicators to see how strong
the economy is. Some of these indicators they analyze include the interest
rate, unemployment rate, gross domestic product (GDP), and consumer price
index.
Government and non-governmental agencies and bodies regularly release these
types of reports; find schedules of upcoming releases for those you focus on
and make note of them. Then, keep an eye on them and see what their effects
are on currency prices for the country or countries you follow.
You should note, though, that the numbers contained in the report are not
what have the greatest impact always. Rather, it's the relation of the
numbers in that report as compared to what had been forecasted previously.
In other words, a hike in interest rates may not have a significant impact
if forecasters indeed thought this was going to happen. However, if they
were expecting interest rates to remain steady and there actually was an
increase, this may in fact have a large impact on currency prices.
There is a disadvantage to fundamental analysis, which is that it can be a
little too broad-based. Although it's a wonderful tool to predict overall
economic growth and price changes, it doesn't give enough details for
investors to target specific exit or entry points. This is why technical
analysis is as valuable as "big picture" analysis is. Technical analysis
does give you that "fine point" analysis.
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