In this tutorial you will learn how to implement fundamental analysis in your trading style. This is what some people called institutional Forex trading system.
You should learn the basic macroeconomic factors that influence global market. This is called fundamental analysis.

There is a great controversy between traders that use only technical analysis and traders that use only fundamental analysis. For me this is only academic. If there is information out there you should carefully watch it. Do not rely only in technicals or fundamentals. Use both. When you have a solid technical pattern that is supported by fundamentals then the chance that you are right is imminent. When technicals and fundamentals show in different directions then you should watch out. Do not be trigger happy with your Forex trading. Wait and see. Forex is not for prophets. You use scientific analysis in order to maximize the chance that you correctly recognize what the market has to give you. Analyze thoroughly, have a solid technical pattern, know the fundamental support of your analysis and you have a nice trading decision. Seize your risk tolerance and you will be a winner.

Every nation has it’s central bank which is responsible for the well being of the economy. Central banks watch some economic factors that affect the economy and adjust their economic policy accordingly. These factors are announced regularly and the exact time of the announcement is known in advance. These factors are the fundamental indicators of the economy. The most important central banks are FED of USA, ECB of European Union, BOJ of Japan and BOE of United Kingdom. There are many fundamental indicators but there are few of them that are called the “market movers”. They are called so because when they are announced they provide to the market the necessary steam to move. That happens because they have a great impact on economy and to traders’ positions also.

The most important thing you have to know about fundamental analysis is the market expectation of an indicator. Some analysts provide a probable number of the indicator to be announced. This has an impact to the market and traders are positioned accordingly. When the indicator is announced it affects the market only when it is much different that the market expected. That happens because every available to the public information is already taken into account. When the new information is announced then it has impact on the market only if it is different than expected.

Build up your plan. Know in advance what important fundamental indicators are to be announced the following week. Learn the expected number if it is available and try to forecast what will happen if it comes in better of worse figure. This is difficult for the beginners but after studying it will be easy.

There are many fundamental indicators. US indicators have the greatest impact on market. European Union’s indicators have less impact unless they are much different than expected. Watch out for central banks head officers speaking out and giving clues about inflation and interest rates. Today these are the two drivers of the economy. Words like vigilant or very vigilant about inflation from central bank’s heads have great impact on the currencies.
When the inflation is up central banks try to keep it low by leveraging interest rates. When interest rates are up then the currency is supported. Learn what economic indicators reflect the inflation and the decision of central bank about interest rates and you have an extra tool in your arsenal in order to trade.

Always watch out what the market already knows because all these information are reflected to the prices of the market. When fresh important information comes out learn it and position accordingly.

There is plentiful information about fundamental indicators in the internet. Visit Bloomberg economic calendar and Yahoo economic calendar. Use keywords like “Forex fundamentals”, or “Forex economic calendars” and you will find what you need. Study the meaning of these indicators and the relationships between them. Most Forex providers have a built in economic calendar with their trading platforms. The time on these economic calendars is frequently GMT. Learn your time zone and the difference between your zone and GMT and you will know the exact time the indicator will be announced. In these economic calendars market consensus, if available, is already reported. Study carefully the economic indicators.
The most important economic indicators (market shakers or movers) are:

Gross Domestic Product (GDP): The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country’s economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.

Non-farm payrolls: A feature report released on Friday of the first week of each month that indicates the number of new jobs generated by the economy during the previous month and the percentage of workers seeking employment that remain unemployed. This is a heavy fundamental indicator that caused a lot of moves in forex market.

Industrial Production: Chain-weighted indicator measuring the change in production of the nation’s factories, mines and utilities. Usually associated with capacity utilization, a measure of industrial capacity and how many available resources among factories, utilities and mines are being used. The manufacturing sector accounts for one-quarter of the U.S. economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.

Purchasing Managers Index (PMI): The Institute of Supply Management, formerly called the National Association of Purchasing Managers (NAPM), releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. It is divided into manufacturing and non-manufacturing sub-indices.

Producer Price Index (PPI): A measure of price changes in the manufacturing sector. PPI measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture and electric utility industries for their output. PPI figures most often used for economic analysis are those for finished goods, intermediate goods and crude goods.

Consumer Price Index (CPI): A measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. CPI reports price changes in more than 200 categories. It also includes various user fees and taxes directly associated with the prices of specific goods and services.

Durable Goods Orders: Measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (more than three years) during which its services are extended.

Employment Cost Index (ECI): Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation’s business and government establishments.

Retail Sales: A measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays and trading-day differences. Retail sales include durable and nondurable merchandise sold and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.

Housing Starts: Measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing a trough or peak. To analyze, focus on the percentage change in levels from the previous month. The report is released around the middle of the following month. Existing home sales and new home sales are other significant reports that reflect how the housing market is doing, one of the most important aspects of the economy.

Analyze the basic support and resistance lines before the announcement, watch the fundamental announcement and enter the market after the announcement is made knowing the way it will move and the extend it will reach.

Watch the video below to visualize the use of this trading system.

This entry was posted on Wednesday, March 14th, 2007 at 8:23 am and is filed under Fundamental Analysis. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.