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Introduction to Fundamental Analysis   courtesy  forex.com

Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a business cycle framework. If you think of the financial markets as a big clock, the fundamentals are the gears and springs that move the hands around the face. Anyone walking down the street can look at this clock and tell you what time it is now, but the fundamentalist can tell you how it came to be this time and more importantly, what time (or more precisely, what price) it will be in the future.

There is a tendency to pigeonhole traders into two distinct schools of market analysis - fundamental and technical. Indeed, the first question posed to you after you tell someone that you are a trader is generally "Are you a technician or a fundamentalist?" The reality is that it has become increasingly difficult to be a purist of either persuasion. Fundamentalists need to keep an eye on the various signals derived from the price action on charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or the myriad of societal issues that influence prices.

Bearing in mind that the financial underpinnings of any country, trading bloc or multinational industry takes into account many factors, including social, political and economic influences, staying on top of an extremely fluid fundamental picture can be challenging. At the same time, you'll find that your knowledge and understanding of a dynamic global market will increase immeasurably as you delve further and further into the complexities and subtleties of the fundamentals of the markets.

Fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist's forecast of the upcoming GDP or employment report, you begin to get a fairly clear picture of the general health of the economy and the forces at work behind it. However, you'll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.

A trader who studies the markets using fundamental analysis will generally create models to formulate a trading strategy. These models typically utilize a host of empirical data and attempt to forecast market behavior and estimate future values or prices by using past values of core economic indicators. This information is then used to derive specific trades that best exploit this information.

Forecasting models are as numerous and varied as the traders and market buffs that create them. Two people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. Therefore is it important that before casting yourself into a particular mold regarding any aspect of market analysis, you study the fundamentals and see how they best fit your trading style and expectations.

Don't succumb to 'paralysis by analysis.' Given the multitude of factors that fall under the heading of "The Fundamentals," there is a distinct danger of information overload. Sometimes traders fall into this trap and are unable to pull the trigger on a trade. This is one of the reasons why many traders turn to technical analysis. To some, technical analysis is seen as a way to transform all of the fundamental factors that influence the markets into one simple tool, prices. However, trading a particular market without knowing a great deal about the exact nature of its underlying elements is like fishing without bait. You might get lucky and snare a few on occasion but it's not the best approach over the long haul.

For forex traders, the fundamentals are everything that makes a country tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is best to get a handle on the most influential contributors to this diverse mix than it is to formulate a comprehensive list of all "The Fundamentals."

 


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Extensive Free Daily Technical Chart Points

9/2/2010 EURUSD USDJPY USDCHF GBPUSD USDCAD
Close 1.2815 84.25 1.0133 1.5392 1.0529
High 1.2848 84.55 1.0186 1.5455 1.0556
Low 1.2777 84.01 1.0096 1.5351 1.0473
Mov avgs EURUSD USDJPY USDCHF GBPUSD USDCAD
5 day 1.2740 84.53 1.0196 1.5434 1.0562
10 day 1.2714 84.69 1.0258 1.5464 1.0556
20 day 1.2834 85.13 1.0353 1.5581 1.0457
50 day 1.2801 86.55 1.0477 1.5439 1.0428
100 day 1.2699 89.23 1.0839 1.5131 1.0376
200 day 1.3352 89.96 1.0669 1.5434 1.0389
Pivots 1.2813 84.27 1.0138 1.5399 1.0519

Source: Free Global-View FX Database


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Global-View.com Chart Gallery
09/2/2010                
20:08 GMT   2yr bp 10yr bp DJIA 10316 61
USDX 82.44 -6 0.49 -1 2.63 5 S&P 1090 11
  USD vs.     Fixed Income   NAS 2199 25
EUR 1.2823 16 0.61 -1 2.28 6 DAX 6084 0
GBP 1.5396 53 0.71 2 2.96 3 FTSE 5371 5
CHF 1.0129 22 0.38 3 1.26 8 SMI 6334 0
JPY 84.23 18 0.13 0 1.12 9 NIK 9063 136
CAD 1.0530 21 1.19 7 2.87 2 TSE 12089 111
AUD 0.9115 16 4.34 -1 4.82 2 ASX 4533 37
NZD 0.7152 32 HSI 20869 245
CNY 6.8080 32 SSEC 2659 36
  EUR vs.     GBP vs.       AUD vs
JPY 108.01 10 JPY 129.68 72 GBP 1.6885 91
GBP 83.29 39 CHF 155.95 88 CAD 0.9601 37
CHF 1.2988 12 CAD 1.6212 21 CHF 1.0820 0
AUD 1.4063 10   JPY vs.   NZD 1.2740 31
CAD 1.3502 46 CHF 83.16 0 Commodities
  CHF vs. CAD 1.25 48 Gold 1251.1 6.30
CAD 1.082 2 AUD 76.8 0 WTI 74.98 1.02
                   
                   



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