INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental analysis is the study of the core underlying elements that influence the economy of a particular currency. This method of study attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors. Fundamental analysis is an effective resource to forecast economic conditions, but not exact currency prices. For example, you might get a clear understanding of the health of the US economy by studying an economists forecast of an upcoming Employment Cost Index (ECI), however that doesn't translate into entry and exit points.

Fundamental indicators for each currency might include, but not limited to; interest rates, central bank policy, political figures/events, unemployment/employment reports, and Gross Domestic Product (GDP). These economic indicators are snippets of financial and economic data published by various agencies of the government or private sectors for each country. These statistics, which are made public on a regularly scheduled basis, help market observers monitor the pulse of the economy. Therefore, almost everyone in the financial markets religiously follows them.

With so many people poised to react to the same information, economic indicators in general have tremendous potential to generate volume and to move prices in the markets. While on the surface it might seem that an advanced degree in economics would come in handy to analyze and then trade on the glut of information contained in these economic indicators, a few simple guidelines are all that is necessary to track, organize and make trading decisions based on the data.

The organization responsible for an indicator generally distributes its reports about an hour before the official release time to the financial news outlets (Reuters, CNBC, Dow Jones Newswires, Bloomberg). The reporters, who are literally locked in a room and not permitted to have contact with anyone outside, ask questions of the agency officials and prepare headlines and analyses of the report contents. These stories are embargoed until the official release, at which time they are transmitted over the newswires to be dissected by the Wall Street community. Most Wall Street firms employ economists to provide live broadcasts of the numbers as they run across the newswires, together with interpretation and commentary regarding likely market reaction. This is known as the hoot and "holler" or tape reading. The more an indicator deviates from Street expectations, the greater its effect on the financial markets.

Economic indicators are classified according to how they related to the business cycle. An economic indicator will do one of the following:

• Reflect the current state of the economy (coincident)
• Predict future conditions (leading)
• Confirm a turning has occurred (lagging)

There is considerable exposure to risk in any currency exchange (Forex) transaction. Any transaction involving currencies involves risk. This includes, but is not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a particular currency.