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Fundamental Analysis

 

Fundamental analysis is the study of the factors that affect supply and demand. The key to fundamental analysis is to gather and interpret this information and then to act before this information is incorporated into the futures price. This lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist.

Food & Agricultural Commodities

These commodities include grains, oilseeds, cotton, fibers, livestock, meat, poultry, dairy products, sugar, corn, soybeans, soybean meal, soybean oil, cocoa beans, coffee, shell eggs, frozen concentrated orange juice, livestock, coconut oil and palm kernel oil. The three broad categories are ‘Grains / Cotton’, ‘Livestock / Lumber’ and ‘Soft Commodities’ (e.g. cocoa, coffee, sugar & orange juice). The fundamental trader studies both supply and demand. The U.S. Department of Agriculture releases several monthly and quarterly reports that supply statistics. Inflation, consumer tastes, consumption patterns and population numbers all affect the demand for meat. The fundamental trader puts all these factors into sophisticated models to try to determine where commodity prices are going.

Financial & Currency trading

These futures encompass currencies, treasury notes and various market indices. As you would expect, trading financial futures calls for a study of entirely different supply and demand factors. The overall health of the economy is a key factor to watch. Economic reports such as the Leading Indicator Index, Consumer Price Index, Gross National Product and the Employment Situation are only a few of the reports providing information.

For example, changes in the economy’s direction normally signal major interest rate turning points. This is obviously important to anyone trading interest rate futures such as U.S. Treasury Bills. The demand for money rises during economic expansion, causing interest rates to rise. Likewise, the demand for money falls during economic recession, causing interest rates to fall. The fundamentalist can also study the relationship of long-term and short-term interest rates to predict the direction of interest rate movement.

Precious Metals

The prices of gold, silver, platinum, palladium, and other commodities are determined, both in the intermediate term and in the long term, by fundamentals of supply, demand, and inventories. Short-term price trends are influenced by other factors as well as these fundamentals.

Gold prices are influenced by numerous variables that include fabricator demand, expected inflation, return on assets, and central bank demand. Gold is strongly pegged to supply-and-demand patterns. In general, low prices result in low production, and high prices result in high production. Market forces determine price. A company's attempt to control costs is critical to maintaining financial health and production levels in the face of declining gold prices. This industry comprises three types of activities viz. exploration, development and production.

 

Energy Trading

This category includes mainly crude oil, heating oil, natural gas and unleaded gasoline. The once-staid oil industry now faces a more unpredictable environment. For 20 years, fluctuating commodity price cycles have mandated new strategies to reduce costs and rethink planning. Pricing pressures, among other factors, are changing the rules. This industry is currently grappling with issues like deregulation, climate change and environmental factors.

 
 
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