forex #6

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Economic Fundamentals: Or, What influences
Prices In the FOREX market
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Before we tell you a little about what this form of market
analysis is and why you should, at least, know about it, use
it some (but not necessarily focus on it), let us give you a
few excerpts from two Traders being interviewed by Jack
Schwager in the now-famous book MARKET WIZARDS.


Once you're through reading these beliefs, from two
legendary market wizards, you'll have a good understanding
on where our ideas are based when it comes to using one
(fundamental analysis) or the other (technical analysis) or
both to predict future currency pair price movement.


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[From page 161 - interview with Ed Seykota]:


QUESTION: What are your thoughts about using fundamental
analysis as an input in trading?


ED'S RESPONSE: Fundamentals that you read about are
typically useless as the market has already discounted the
price, and I call them "funny-mentals." However, if you
catch on early, before others believe, then you might have
valuable "surprise-a-mentals."


QUESTION: You answer is a bit facetious. Does it imply that
you only use technical analysis?


ED'S RESPONSE: I am primarily a trend trader with touches of
hunches based on about twenty years of experience. In order
of importance to me are: (1) the long-term trend, (2) the
current chart pattern, and (3) picking a good spot to buy or
sell. Those are the three primary components of my trading.


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Now, let's look at Bruce Kovner, who has a
less pronounced one-sided belief on this issue:
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[From page 60 - interview with Bruce Kovner]:


QUESTION: Do you always use fundamental analysis in forming
your trading decisions?


BRUCE'S RESPONSE: I almost always trade on a market view; I
don't trade simply on technical information. I use technical
analysis a great deal and it is terrific, but I can't hold a
position unless I understand why the market should move.


There is a great deal of hype attached to technical analysis
by some technicians who claim that it predicts the future.
Technical analysis tracks the past; it does not predict the
future. You have to use your own intelligence to draw
conclusions about what the past activity of some traders say
about the future activity of other traders.


For me, technical analysis is like a thermometer.
Fundamentalists who say they are not going to pay any
attention to the charts are like a doctor who says he's not
going to take a patient's temperature. But, of course, that
would be sheer folly. If you are a responsible participant
in the market, you always want to know where the market is--
whether it is hot and excitable, or cold and stagnant. You
want to know everything you can about the market to give you
an edge.



Technical analysis reflects the vote of the entire
marketplace and, therefore, does pick up unusual behavior.
By definition, anything that creates a new chart pattern is
something unusual. It is very important for me to study the
details of price action to see if I can observe something
about what everybody is voting for. Studying the charts is
absolutely crucial and alerts me to existing disequilibria
and potential changes.

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So, by now, you've probably figured out one of the unspoken
truths of trading: there is a tendency to pigeonhole traders
into two distinct schools of market analysis - fundamental
and technical.


For forex traders, the fundamentals are everything that
makes a country tick. The release of economic & inflation
indicators (i.e., consumer spending, employment cost index,
government spending, producer price index, etc.), political
factors, government policy or an individual event can set
the market in a frenzy. These have to be considered when
making the decision weather to trade or not.


Technical analysis, which we will cover more in tomorrow's
lesson, simply put is a way of using historical price data
(via the charts) in different ways to predict the future
price of a currency pair.


Charts are needed, but the reality is...


Fundamental analysis is a very effective way to forecast
economic conditions, but not necessarily exact market
prices. Or, said another way: as a general rule, while you
DO need to have a handle on the most influential
contributors for the cause of a currencies price to move up
or down, you MUST trade in agreement with the supporting
technical indicators.


The reason foreign exchange traders put the most emphasis on
technical analysis is because traders around the world use
similar charts and tools in predicting market trends. The
reason the FOREX market can be so predictable some times is that if the
majority are using the same graph for determining patterns and trends,
then it is highly likely
that they will act in a similar manner. So several thousand
traders who have all charted the same resistance line, for
example, will most likely set their trades and direction to
conform to that line.

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Since we'll be teaching you, via our courses, to become
sound TECHNICAL TRADERS, we'll cover it more in detail
tommorrow; however, we still wanted you to know what
FUNDAMENTAL analysis is and what it does.


Here's a little more background.


When fundamental data is made available to the public there
is a reaction from investors and speculators. Information
in the form of news and economic indicators is more vague
than that of technical indicators. There is a lot of gray
area in this type of analysis. The market will ultimately
react to how people think the economic data compares to the
current market situation.


Economic indicators usually reveal information that "Should
cause a currency to go up in price" or "May cause a currency
to go down". The words 'should' & 'may' in the quotes above
reveal the ambiguity of the fundamental data.


Here is an example of what analyzing fundamental data is
like. Let's suppose there are six economic indicators
(there are a lot more). Let's call our six indicators
A,B,C,D,E, & F. Now we wait for the data from our
indicators to be published in a financial magazine or at an
online source. We manage to get the readings for our
economic data for the EURO:


Indicator A: is in a range where the Euro may go up
Indicator B: is in a range where the Euro should go up
Indicator C: is in a range where the Euro could go down
Indicator D: is in a range where the Euro usually goes down
Indicator E: is in a range where the Euro could go up
Indicator F: is in a range where the Euro may go down


By looking at the above indicators, you don't know what the
Euro is going to do. Furthermore, currencies are always
traded in pairs (as was explained in Lesson #3). So you
would have to get the fundamental data for another currency
pair and compare it with the EURO. We think you can
appreciate that this is no simple task.


We do not want to discourage you away from fundamental data.
The best way to learn is to learn about one piece of
economic data at a time. Eventually you will build a puzzle
from all of the fundamental and technical data and make more
informed trading decisions.