Fundamental's Vs Technical's

Fundamental's vs. Technical's - Trading Dispatch

What's the big deal?

What is the big deal…? No, Really? In this lonely and dangerous world of Forex, like any other, you probably will have heard the term Fundamental Analysis which sounds like something you ought to know about right. Let’s take a look

Fundamental analysis is the use and study of economic factors in a given country in an attempt to gauge the current or, more profitable, future value of that country’s currency. But wait… I thought we use technical analysis to do that. Not exactly and it is important we don’t ever confuse the two. Technical analysis is your way of finding a probable move in price. May I introduce to you Technical Analysis’ older, in every sense of the word, sister Fundamental Analysis.

Are Fundamentals… Fundamental?

Stick with me. One has to think “why is the price of a currency what it is?” and that’s where fundamentals come in. A country is much like a business but its ways of perceived value are the overall growth in that country, unemployment, and inflation. People analyze the changes in these factors and come up with a forecast of that currency’s future value.

“Ok, well how do I trade that?” That question is precisely why the glass slipper doesn’t exactly fit onto Fundamental Analysis. Even after analyzing all these factors to create a bigger picture, there’s still a question of when this forecast will take form if at all. This is where Technical Analysis is a “Shoe-in”

Pun intended.

With Technicals, our job is to determine an entry and exit that must accommodate our forecast. We can safely assume there are bigger and badder traders than you, or me, who have the capital and resources to get information about a country’s affairs before most people on the planet and put on positions in the market to get ahead of a price move.

That last sentence is why most traders tend to believe any fundamentals are ALREADY PRICED INTO the market price. “Wait… So if Fundamentals are already priced in, are they irrelevant to my trading?” NO, and don’t ever allow yourself to think that again or you might just go broke or worse yet, miss out on opportunities.

Buy the rumor, sell the news

In my final year of school there was an election in the U.S. (there no bigger fundamental) and on the day of, I had an English exam to write. I had stalked price all through the night and had Bloomberg playing on all my devices, in hindsight I have no idea why. That morning as the polls were coming to an end the U.S. dollar was weakening… HARD.

It seemed inevitable that an unfavorable outcome would occur. So I put on a short worked a stop and left to go and write my paper. Time had never moved slower I promise. When I got done it was confirmed that the worst actually had happened, Donald Trump was elected The President of United States of America.

But the charts looked different. Price had retraced almost completely and took out my stop and carried on rallying. Leading up to the Final polls everyone had thought that the world would lose faith in the U.S dollar but upon further study I learned that as soon as Trump was elected he started talking about Building walls (As if that ever solved anything), More Jobs and Tax Cuts the U.S dollar summited an absolute cliff of almost 400 pip drop and continued to rally 3-fold until the year was out.

That is not first, nor will it be the last time that news comes out and does the opposite of what is expected. News trading can be this dangerous but fortunately or unfortunately for some, the impact of news is not what it once was. I’m sure there are seasoned traders who still trade news profitably but instead, fundamental news events should, I think, be used in conjunction with technical analysis.

Why? Because if a new president is elected, your double top/ bottom, harmonic pattern, Elliot wave, pivot point, support/resistance, moving average, MACD becomes obsolete. So an approach that considers high impact news is definitely a wise one.

So what?

So who do you want to be? The choice between the two comes down to your approach and beliefs toward the marketplace. If you have some capital and prefer to play the long(er) game then fundamental analysis might be for you. Traders would ONLY trade this way before there were charts ergo Technical Analysis so there is promise in it.

Technical Analysis might tickle your fancy because you prefer to be involved in the short term moves which are also profitable. It’s much easier to determine the short term direction of the market then the long term using technical analysis.

While News Trading is a different beast altogether, I found it to be profitable once. Volatility and my own risk appetite changed that for me but staying in touch with the latest news has helped me avoid unnecessary losses countless times.

If ever you feel tempted to trade a big Fundamental event, remember that markets are run by banks and influenced by people. Buy the Rumor Sell the News.

 

Don’t bet the farm.

Don’t lose your shirt.

Cut the L.

Keep the W.

Happy Trading.

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