CHAPTER 28

Building a Forecasting Model: A Step-by-Step Approach:

Economics as a positive science is a body of tentatively accepted generalizations about economic phenomena that can be used to predict the consequences of changes in circumstances.

—Milton Friedman

Because of the heterogeneous nature of commodity markets, there is no such thing as a standard fundamental model. Among the key substantive characteristics that differentiate markets are degree of storability, availability of substitutes, importance of imports and exports, types of government intervention, and sensitivity to general economic conditions. Consequently, in contrast to technical analysis, in which a specific system or methodology can often be applied to a broad spectrum of markets, the fundamental approach requires a separate analysis for each market.

The time-consuming nature of fundamental analysis makes it virtually impossible to cover a large number of markets adequately using this approach. Thus, as a practical matter, a trader wishing to employ fundamental inputs in trading decisions must resort to one of the following alternatives:

  1. Restrict fundamental analysis to a superficial examination of the key statistics in a broad range of markets.
  2. Employ in-depth fundamental analysis for only a few markets and trade all other markets based on technical input only.
  3. Rely on published fundamental analysis.

The first alternative is usually a poor compromise. Market knowledge based on a cursory examination ...

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