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What is Fundamental Analysis?
Fundamental analysts base their trades on a countries economic strength. Economic news can often have a large impact on price. You can keep track of economic news releases by using a Forex calendar.
Fundamental analysis uses economic data to predict moves in currencies. By interpreting economic data, you can gauge the strength of a countries economy. For example, if Europe has a strong economy and the U.S. has a weak economy, a fundamental trader might go long. This is because the trader expects the Euro to rise in value against the Dollar.
Fundamental traders tend to hold trades for weeks, or even months. This is because economic factors don’t usually cause immediate spikes in currency value. A good example of this is interest rates.
One of the most important economic indicators for fundamental traders are interest rates. Countries with high interest rates are attract more foreign investments. If you had a choice to invest your money at a 0.5% interest rate or a 5% interest rate, you would obviously pick the 5%.
Over a long period high interest rates cause a currencies value to rise as people invest in the currency. So, if the U.S. had a 1% interest rate and Europe has a 0.05% interest rate, the U.S. dollar may rise in value against the Euro. This means that a fundamental trader would short EUR/USD.