Fundamental analysis concerns itself with the causes of price movements. It doesn't attempt to predict future price movements per se, but because economic events move far slower than market developments, it's usually the case that a phenomenon established by fundamental analysis will be valid for a longer time than the market reacts to it, and discounts it (due to the market's erratic, irrational and emotional behavior), and it's this fact that the trader exploits for profit.

Fundamental analysis is about economy and politics. It is important to keep up-to-date about weekly employment statistics, consumer price inflation, interest rates and similar "hot" indicators that are at the forefront of newspapers pages and TV screens, but just being aware of them and expecting the market to react to them in the desired fashion in a short time is not fundamental analysis, nor is it common sense. In fact, as we mentioned in the earlier paragraph, the main reason that the trader can profit through fundamental analysis is that the markets do not react reasonably to fundamental developments.

Let's illustrate our point with an example:

Until the autumn of 2007 the US had very low unemployment: Toward the latter part of the second presidential term of George W. Bush, unemployment in the US moved below five percent, and it remained at those levels for a considerable time. Most of the data released through this period remained positive overall, with the exception of the housing market, where conditions had been deteriorating since 2005.

Thus, most of the data and news releases were positive, and if we're seeking to show that fundamental analysis provides good guidance to the trader, it's clear that we do not have that guidance in the patchwork of numbers that attracted the most of the media attention. Focusing on the news releases, without placing them into a working context, without understanding the workings of the economy, the trader is as blind as the proverbial blind man who tries to describe an elephant by a few gropes at its feet, the tusks and the trunk.

Like most good things in life, being successful in performing fundamental analysis requires study and patience, but once again, there's no expectation of exceptional skills from the trader. Economics is a popular field, and most of the data necessary for understanding the market is available online with research provided for free, in many cases, by big banks and government institutions. What the investor is expected to do is not to memorize the numbers and compare each week's release to the previous one, but form a coherent mental picture of "what happens why".

Finally, let us repeat here that most of the major fundamental events that the market appears to discount in a few days of trading at most, have in fact effects that last far longer and reach far deeper than the violent but brief reactions of price movements suggest. Interest rates and unemployment statistics are simple but effective examples for demonstrating our point: The effects of the interest rate reductions during 2000-2001 had lasted for at least 4 years in the real estate market, and had a great role in establishing the downward dollar trend that lasted between 2001 and 2008. Similarly, the trend of job creation in the US and abroad, once begun, had a deep and lasting impact on global stock prices and forex trends which went through all sorts of panics and shocks during this same period (the Iraq War, and several defaults by some large firms are good examples). In the end, however, the so-called big picture of stability supplied by high employment and low interest rates always brought the markets on track. What caused them to collapse eventually is outside the subject of our discussion. But, the fact that fundamental economic events are long-term, and that their effects last longer and are deeper than the market discounts is a fact that is not changed by all these deveoplments.

Let us briefly examine a number of the major economic indicators used in fundamental analysis.

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In a previous chapter, we discussed what technical analysis is. In this section, we’ll take a look at the various indicators and patterns that are used in technical analysis.

The most basic tool of the technical analyst is the chart which depicts price action during a specified time period. Charts are useful for giving us historical information, and they can provide a snapshot of the market at the moment they are drawn.Let us look at the two main types of charts according to how they depict price movements:

Line Charts

The line chart is simply a graph of price points connected by lines. The vertical axis, as shown in the symbolic chart below, depicts prices, and the horizontal axis matches a particular time to each price quote on the vertical axis. Line charts are pretty simple and straightforward and the trader will have no difficulty in getting used to them with a tiny amount of practice.

The advantages provided by line charts are in clarity and simplicity: instead of cluttering the vision with highs, lows, opens and closes, the line chart gives a historical picture of the underlying trend, and the trader is free to make his interpretations. The line chart is perhaps best used to supply the trader with a basis on which he can build his trading strategy. Once he’s got a grasp of the underlying movement, he can use other, more detailed charting tools to precisely define where and when he will move to make a trade.

Candlestick charts

By the standards of technical analysis, the candlestick method is ancient. Its origin is thought to be 18^th century Japan, and legend credits a certain Homma Munehisa with its invention.

The candlestick chart packs a lot of information in a very concise and useful form: Let’s see an example in the graphic below:

The black candlestick signifies a market session that closed on a higher price quote. Conversely, the white candlestick tells us that the prices closed lower. The body of the candlestick shows the open and close values (when depicted on a price chart), and the top and bottom edge of the wick shows the highest and lowest values for the session.

Let us see the various types candlesticks the trader can encounter on any chart:

• Hammer – a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.

• Inverted hammer – signals bottom reversal; Shaven bottom - signaling bottom reversal, the hammer has no lower wick; Shooting star - a bearish pattern during an uptrend. The candlestick has a small body, a long upper wick, and a small or non-existent lower wick)

• Doji – the candle body is squeezed to a thin line, neutral signal.

• Long legged doji – signals a top reversal

• Dragonfly doji – when there’s no upper wick, and a long lower wick, the candlestick signifies a trend reversal to the bullish side.

• Gravestone doji – when there’s a long upper wick, and no lower wick, the candlestick signals a trend reversal to the bearish side.

• Marubozu white – no wick, depicts a beginning or continuing bullish trend.

• Marubozu black – no wick, depicts a beginning or continuing bearish trend.

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Needless to say, any method that works is a good method. Conversely, any trading method that fails — however convincing the arguments behind it — is useless. While this is so, it’s often hard to characterize what success or failure is for a forex trader. A trade that was a failure when it was closed can easily become greatly profitable for you a short while later, and vice versa. Many times the losses suffered by forex traders are caused by emotional problems related to a lack of knowledge or confidence, rather than any flaw of the method used. Thus, when determining which method you would like to use and how to use it, you must first determine your own goals and capabilities, so you can choose the most suitable method for your trading goals.

It’s quite clear that for long-term, investment-minded traders, fundamental analysis offers the greatest potential return over a long period of time. Those who focus on fundamental analysis will be able to ignore the day-to-day fluctuations in the currency markets, and will also be able to avoid the pitfalls associated with whipsaws and similar sudden and unexpected movements. However, doing so requires a great deal of patience and emotional resilience — not to mention a significant investment in time and energy — before you have enough confidence in your skills, and can ride through the sometimes scary corrections and counter-trend movements. To be sure, the trader can gain the necessary confidence through study and patience, which means that success in the forex market requires no special talent or intellectual genius.

For short term investors who want to get into the thick of the action in the market and make sense of the nonsense out there, technical analysis is obviously the best tool. Those with experience in forex trading know only too well that in the short-term, even the most convincing news releases or statistics might fail to move the market in the anticipated direction, and in some cases, the market may react unfathomably to fundamental factors. Technical analysis is the tool of the financial rodeo rider, who wants to tame the raging beast of the markets, and we can only admire him for his courage and be astonished at his success when he achieves it.
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The beginnings of technical analysis is usually dated to the Dow theory, and to the early part of the 20^th century. Over the years, many contributors have created indicators, oscillators and moving averages of all sorts to increase the arsenal which the trader can utilize to understand the forex market. But the basic principles of technical analysis have remained the same:

• Prices discount all available information
• Prices trend (in other words, price movements are not random)
• Historical data is useful for predicting future developments

As noted previously, technical analysis is useful for analyzing price patterns that emerge as a result of global economic activity. Thus, it’s different from fundamental analysis: Its effectiveness is greatest when market participants are the most emotive; the total turnaround in the market is constant with little new money entering or exiting; and economic fundamentals are of short-term value only.

This may perhaps appear counterintuitive to what many have come to believe over the years. But in fact, those who are most successful in using technical analysis are those who follow the long-term trend, and the long-term trend is merely another name for what is called the “big picture”, as painted by fundamental analysis.

Technical studies are useful for determining entry and exit points, because the information provided by fundamental analysis is too vague when it comes to price and quotes. While not precise, technical analysis does provide the trader with a number of tools for determining points of action, and the trader can use any method that he feels comfortable with, provided he knows what he's doing.

On a final note, although the new forex trader may perhaps be overwhelmed by the vast number of indicators and such that are available for his use, the good news is that only one from a each type of indicator will usually provide all the data necessary for trading. Later, we will examine indicators in detail.

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