Trading forex by using a fundamental analysis is one of the methods of forecasting the price movements of currency pairs in the future based on economic (Supply and demand), environmental (seasonal cycles and weather), political (government policy) and many other relevant factors as well as statistics that have the potential to affect the supply and demand. A forex trader who executes orders on the basis of fundamental analysis studies the effect of fundamental elements that cause prices movement in the market.
Unlike the technical analysis which works with the result of all these forces manifested in various technical price formations, the fundamental analysis is chiefly concerned with establishing the causes of the current and future price moves. The fundamental analysis is best used to determine the likely direction of the currency pair in the long-term. The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen.
As a forex trader you can take a fundamental approach to investing in much the same way a stock trader does. Just as a fundamental stock trader looks for relative value among the universe of stocks, you can do the same thing among the various currencies because currencies are affected by economic events just as stocks are. Currencies or more accurately - the country whose currency you are evaluating - have underlying fundamental aspects which affect their value in much the same was as a stock does.
Many forex traders perform a daily review of economic calendars for the currency pairs they maintain positions in. They do so since the release of such key information can often result in considerable short term volatility in the currency market, as well as prompt shifts in market sentiment. Key economic factors that are routinely covered in the current news and which can move the market when they are released includes the Interest Rates, Inflation, Gross Domestic Product (GDP), Non Farm Payroll, Commodity Prices, Employment Data, Industrial Production, Retail Sales, Consumer Price Index (CPI) etc.
Fundamental Analysis can be very complex and time consuming. It is truly an academic exercise, but a general understanding of its principles in a given situation will help point you to where you may have your greatest potential for gain. Fundamental traders take the approach that a countries underlying economic and political conditions drive currency prices. They monitor regular economic reports to react to surprise figures, and evaluate trading nations. Knowledge of these basic market dynamics is crucial for success in the forex trading.