Fundamental and Sentiment Analysis
Fundamental analysis in forex involves analyzing the economic, social and political forces that affect the value of a country’s currency. All of the news reports, economic data and political events that come out about a country are similar to news that come out about a stock and are used by investors to obtain an idea of value. As the economy of a country is changing over time, so does the value of its currency.
As a general rule in economics, supply and demand determine price, the same stands in forex. A trader can determine the demand and likely fluctuations in value for a particular currency by understanding the relationship between an economy and its currency value; this is what fundamentals traders do. It may sound complex, but the most important premise is that if a country’s economy is good, then the value of its currency should be high as well. As the economic profile of a country strengthens; the value of its currency is increasing.
In order to develop understanding of a country’s economic outlook, you need to know which factors affect its economy and how to analyze them. This is similar to the analysis of the factors that affect supply and demand, which events and indicators could cause an increase or a drop of a currency’s economy and as a consequence a currency’s value? The better profile a country’s economy has, 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.
Some important indicators to use are the figures and statements given in speeches by important economists, CEOs or politicians. Those are known as economical announcements that have a big impact on currency moves, especially those that are related with USA economy as USA has the biggest impact in the market. Later on, we will examine in detail several fundamental indicators and the way to analyze them.
Sentiment analysis is a type of forex analysis that focuses on identifying and measuring the overall psychological state of all participants in the market. Sentiment analysis attempts to identify what percentage of market participants are bullish or bearish. The market basically represents what all traders feel about the market.
Retail traders can’t move forex market in their favor. If the majority thinks it is a bearish market or a bullish market and you don’t, you can’t actually do much about that. Sometimes you need to adapt rapidly to this kind of change. If you get an idea of what market participants may be thinking, you can better predict the market in your favor. If you choose to ignore forex sentiment analysis, then you simply increase your risk. Being able to quantify market sentiment is an important tool.