Basic Beans

Fundamental Analysis


Jul.18.2013

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Fundamental analysis is the art of using all the gossips, stories and events about a country’s economy, to make a decision whether that country’s currency is worth buying or not.

Most of the news that you hear on the radio and TV are trying to help you get a glimpse of the fundamentals. Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that affects the supply and demand of a currency.

 

Danial Fig08 01

Forex traders buy and sell currencies with the hope of making a profit when the value of the currency changes in their favor, whether from market news or events that take place around the world. Currencies, just like anything else that can be bought or sold, are subject to the laws of supply and demand. When people want a particular currency, the cost of the currency in terms of other currencies will go up.

This law also applies in dating and relationships. The more desirable a brand is, the higher the price. More demand makes it more expensive! (Think Gucci and Louis Vuitton.)

Similarly, when demand decreases or people do not want to hold a country’s currency, the value will go down.

Forex traders have to analyze all the factors that affect supply and demand. In this case, a forex trader is just like someone who is deciding who to marry. The demand for popular guys is much higher, right? Why is that? What does a woman look for in an ideal catch? If we put the chemistry and having things in common aside, a woman tends to analyze a guy’s “profile” from different aspects before she makes a final decision:

She wants to know if he is financially stable. She wants to know if he is honest, or in other words, he isn’t going to put her in a “political turmoil.” She wants to know whether or not he is productive, is going to be a good father, if he pays his bills on time and has a bright future.

A Forex Diva analyzes her prospect from different aspects before she says yes. A Forex Diva will do the same before she puts an order of a specific currency in the forex market.

In other words, when you are at a forex party, you have to look at different factors to determine which country`s economy is a good catch, who is a keeper, and whose economy sucks. You have to understand the reasons of why and how certain events like an increase in unemployment affect a country's economy, and ultimately, the level of demand for its currency.

Even if its current situation is reasonable, you still want to analyze where its economy is going in the future. The idea behind it is that if a country's current or future economic outlook is good, their currency should strengthen.

Just like when a man seems to be a good partner for now and a good father in the future, women won’t leave him alone, the better shape a country's economy is, the more foreign businesses and investors will invest in that country, which will ultimately lead to a higher currency value.

Girls around a popular guy with money

Things That Make a Country’s Currency Unpopular

  • - Rise in unemployment
  • - Fall in GDP (Gross Domestic Product)
  • - Fall in Exports
  • - Fall in interest rates
  • - Geo-political tensions
  • - Natural disaster
  • - Threat of terrorism

Things That Make a Country’s Currency Popular

  • - More jobs
  • - Rise in GDP
  • - Rise in exports
  • - Rise in interest rates
  • - Super stable political system
  • - Discovery of gigantic oil or mineral resources

 

You will learn more deeply about fundamental analysis after you have graduated the Basic Coffee Beans and moved on to the Fundamental Beans.

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