Types of Fundamental Analysis
Each trader chooses his own method of market analysis. Still, it’s impossible to completely ignore the impact of economic events on Forex. Some traders prefer to avoid the market during the major news releases, others use them as a great way to make money.
There are two types of economic indicators:
- Macro-fundamental statistics. These data include the employment rate, inflation level and economic development of the country. These indicators change gradually. They are used mainly for long-term trading strategies. They are more suitable for swing and position traders.
- Economic news. This is a direct publication of the latest data. The event provokes a sharp surge in activity in the foreign exchange market, but the reaction, as a rule, is short-term. This type of economic indicator is called the micro-fundamentals. It is worth noting that the reaction to some important indicators lasts up to several days. This can trigger the formation of a short-term trend first, and then a long-term trend. Thus, economic news can influence the overall macro-fundamental picture.
Classification of Economic Indicators
If you previously used the economic calendar, then you know that they are divided into several types, depending on the level of their influence on the currency quote:
- Leading indicators. These economic data help predict possible economic changes before they occur. They are used to understand the future state of the economy in the country, as well as to plan changes in fiscal and monetary policies. Leading indicators include oil and gold prices, retail sales, labor market statistics, consumer expectations surveys, new housing starts, and others. In the calendar, these indicators are marked in red.
- Coincident indicators. These data indicate the current state of the economy and show the current stage of the cycle. The main coincident indicators are GDP, CPI, PPI, trade balance, industrial activity and personal income reports. These indicators are marked in orange or yellow.
- Lagging indicators. These indicators confirm the already established economic trend, while they may be several quarters late from the cycle itself. Lagging indicators include consumer surveys, unemployment rates, company earnings reports, and others. Depending on the calendar, this news is marked in yellow or green.
To Summarize
We learned about the types of fundamental analysis, as well as how economic indicators affect the foreign exchange market. Having chosen the right strategy, you can use these indicators for both short-term and long-term trading.
In another article, we will also consider 5 main types of economic indicators and find out how each of them can affect the current state of the market. Understanding how a currency pair can respond to a particular news event, you will learn to evaluate its risk level in relation to potential profit. This will help you build your unique news trading strategy.