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Lessons from the Pros - Forex

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Forex Fundamentals & News: The Good, The Bad and The Ugly

Tue, Oct 13 2009, 10:16 GMT
by Sam Evans

Online Trading Academy

There is a lot of information on trading and I mean a lot. As traders we can use various tools such as charts, news, Fundamentals and Technical Indicators to name just a few. But what are the best ones to use? In a world full of opinion and hypothesis, it can often be difficult to decide on what route to take when speculating in the Forex markets. As I have stated many times in the past, the key to consistent results in the market is being comfortable with the set of rules that you as an individual stand by that respect the key dynamics of price movement such as trend, supply and demand. On occasion you will be right and on others you will be wrong; however, as long as you strive to keep your losses small and allow your winners to run, you will always find yourself on the right side of the track in the end. "Easier said than done," I hear you say and you would be right! It takes discipline, education and enthusiasm to make trading work, but with the right attitude and approach, anyone can make it happen. It is my job as an instructor in the ongoing XLT - Forex Trading program to help students define their rules and strategies in an effort to make their trading rule-based, unemotional and simple. We focus on price action and allow the market itself to guide our analysis and trading decisions, only selecting the high probability, low risk opportunities which the market provides us with.

In the XLT room, we also accept that there is a plethora of fundamental information and economic news being released each and every day but we don't fall into the trap of basing our trading decisions upon this data. And there is a reason why. Think back to when you first considered trading the Forex markets: Remember how you learned of the leverage you could trade with and the flexibility of a 24-hour market? Do you also remember how you discovered that the Forex market was more transparent than the stock market because there was no such thing as insider trading? Everyone receives the same economic data at the same time, therefore, allowing a much fairer opportunity to trade the news and Fundamentals...or so it seemed. If your experiences of trading are anything like mine (and let's face it, we all go through pretty much the same things at the start of our trading careers), then you soon learned that the market has a habit of doing exactly what the news and Fundamentals suggested it would do one day, only to completely ignore this information on another day and do the complete opposite! Very frustrating indeed, so to be consistent there is a need to ignore the outcomes which could happen and focus on what is actually happening.

After a number of years working to develop my own style of trading, I have taken the route of focusing on the technicals to make my decisions and allowing price action to guide me in the markets and the reason why comes down to a very simple logic. Price itself is the only honest thing I can rely on. The market functions as a discount mechanism where the big money factors the fundamental information and expected news into the current price, ahead of time. The current price is a result of all of the information from the past, from now, and what is expected in the future. All I need to know is where price is in the instant and if it is cheap, then I am an interested buyer; if it is expensive, then I am an interested seller. Even if the Fundamentals line up with the market's price action, I still can't gauge an entry or an exit from this information alone. I need something more and this is where the use of charts and objective Technical Analysis comes into its own. We can never get the news and Fundamentals to line up perfectly with the market's reaction everytime, so the solution is to sit back, stick to the plan and take the guess work out of it. Let's look at some recent examples of market action and Fundamentals.

The Good

Here is an example of some recent price action on AUDUSD:

This currency pair has been in a big uptrend for a while now, supported by Australia's stable economic position and also by the rising price of Gold. The nation also made a surprise interest rate hike on Tuesday, October 6th, which further supported this uptrend. So here we have an example of where the Fundamentals supported the market's price action. However, it is also important to note that the origin of the latest rally in the currency pair started when it tested a key area of demand on Friday, October 2nd. This was before the rate hike, at an area where a number of XLT students took this pair long in advance, well before the news and without any knowledge of the upcoming rate increase.

The Bad

Now let's take a look at EURUSD. From September 22nd the pair sold off sharply, supported by various bad economic data from the region including low CPI figures, low consumer confidence and low employment stats. Even a German election didn't help until the market hit an area of demand and erased its losses around the same period of time. A tough one to call for sure; so much easier to just go with the trend until you have a reason to change tactics, like when we hit an area where the pair is cheap and the probability is that it will rise. Or in other words, a point at which demand is objectively greater than supply. No amount of news of Fundamental analysis could have predicted a turn as sharp as this. The best plan is to just trust the price.

The Ugly

And then we have my domestic currency the Pound. I can't really bracket this as anything but a mess right now. We all know that the UK is well over-leveraged, very much in debt and recent figures have shown further declines in the current account, Manufacturing PMI and our economists remain as gloomy as ever. It seems that housing prices have risen a little but nobody is getting too excited about that either and the GBPUSD price action is a true reflection of this. It is ugly to say the least: Stuck in a range between support and resistance with mixed signals and little follow through. Trust me, at the time of writing this article, there are much better things to trade.

All we can do as GBPUSD traders is to wait patiently, set realistic targets and focus on the price action...for now the market is just sitting on its hands and most of the time it pays as an independent trader to do exactly the same when things are this ugly!

In summary, the point I am making is that we can never fully interpret the Fundamentals and news and how these factors will affect price. Of course, every piece of news released should have a predefined impact upon the market depending on its nature, but so often the result is the complete opposite and why should we be surprised? How can any trader in the world today objectively interpret Fundamentals and news if they don't know exactly what every other trader or institution is doing at the same time? This is an impossible task. Rather, it would be far easier to allow the market itself to show you subtle clues as to where it is likely to turn; gather your evidence, take the trade, place your stop and let things be. In reality, the only honest thing in any market is the price, so trade that and that alone. Everything else is pretty much opinion and if the market does not share the same opinion as yours, then you could be in a world of hurt. Something to think about for the future I hope.

Published on  Tue, Oct 13 2009, 10:59 GMT