Fundamental Analysis: A Complete Guide

The global foreign exchange industry can be considered as the world’s largest market. With daily trade volumes averaging around $5.3 Trillion, it far surpasses others such as the stock market. With participants ranging from large institutional investors such as Banks and Hedge funds to small retail traders who take up forex trading in emerging economies like Sri Lanka, the market is festered with traders of all sizes. By using legal tender as a financial instrument, traders speculate on the rise and fall in demand for federal currencies and use them to make profits.

This change in the prices of currencies is driven by various economic factors. The activity of discerning these factors and using them to analyze the charts is known as Fundamental Analysis.

What does Fundamental Analysis entail? What are the factors that are used in Fundamental analysis?

There are two main factors that are used when fundamentally analyzing market movements. They are:  Economic Factors.  Central Bank Decisions 1) Economic Factors refer to all the factors that represent the macrocosmic view of the market and its climate. These are factors that predict the health of the market in either retrospect or by extrapolating news releases and analyzing if the market has the capacity to fare better or if it could face a downtrend. It comprises of both leading and lagging indicators.

2) The central banks are the institutions that are authorized to issue currencies and regulate their flow in the global market. They regulate the liquidity in the market by raising and dropping exchange rates and interest rates. By carrying this out, they either increase the demand for currencies or drop them. By speculating on this news, traders use their trading account to invest in the currencies that are expected to post a growth.

The aforementioned factors reiterate the reason why fundamental analysis is a crucial tool for traders who are engaged in online trading. Using fundamental analysis enables traders to predict the performance of currencies in advance and use the same to one’s advantage. For novice traders who are engaged in forex trading in Sri Lanka, understanding the market is essential. They can partner with reputed online brokers like WesternFX and learn about the economy and its cycles in detail. They can also learn the art of interpreting the news.