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It is generally said that information is the secret to profitable Forex trading but, though correct and up-to-date information is indeed crucial for currency trading, it is the examination of this information that is the true secret. There are currently two main forms of analysis which are used in foreign currency trading � technical analysis and fundamental analysis - and here we are going to look at just what is meant by fundamental analysis. In its simplest form, fundamental analysis looks at economic and political conditions that could affect currency prices and Forex traders who use fundamental analysis rely on news reports for information on a whole range of things including growth rates, economic policy, inflation and rates of unemployment. Basically, fundamental analysis gives an overview of currency movements together with a broad picture of economic conditions which could well alter the value of a specific currency. With this picture in mind, foreign currency traders will then often move on to use technical analysis to plot entry and exit points into the market and to complement the information gained through fundamental analysis. The foreign exchange market is much like any other market and is affected by the forces of supply and demand, which are themselves affected by economic conditions. Two of the most important economic factors affecting supply and demand are the strength of the economy and interest rates and the strength of the economy is itself affected by foreign investment, the gross domestic product (GDP) and the economy's balance of trade. A whole variety of economic indicators are published by governments and other sources and are generally held to be sound measures of the health of an economy that are followed by all sections of the investment market. Most economic indicators are published monthly but some are published more often and normally weekly. Two of the key fundamental indicators are international trade figures and interest rates, but other especially helpful indicators include the consumer price index (CPI), purchasing manager's index (PMI), durable goods orders, producer price index (PPI) and retail sales. Interest rates are an extremely important indictor because they can have a strengthening or weakening affect on a particular currency. For example, high interest rates might attract foreign investment and strengthen the local currency, while investors in the stock market frequently react to rises in interest rates by selling because of a belief that the higher cost of borrowing will have an adverse affect on many companies. Large-scale selling by stock market investors can often cause a downturn in the stock market and the economy. Indicators of international trade are also very important to the foreign exchange trader. A trade deficit, with imports exceeding exports, is normally seen to be an adverse indicator as money leaving the country to purchase foreign goods might well have the affect of devaluing the currency. However, fundamental analysis will also provide an indication of market expectations and these will generally dictate whether or not a trade deficit is unfavorable. It might be the case, for example, that a particular county normall operates on a trade deficit and that this has already been taken into consideration in fixing the price of its currency. In general terms, a trade deficit will only affect currency prices in cases where they are higher than the market would ordinarily expect. Every country has its own particular set of economic indicators (there are currently some 28 major indicators in use within the United States) and these have a strong influence on financial markets. As a consequence, Forex traders need to be aware of them and study them with great care when preparing their trading strategies. Fortunately, for those traders working on the Internet, many sites now provide a wealth of the latest information, but it is up to individual Forex traders to take this information and apply fundamental analysis to it to make their trading decisions.
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