Hello traders! This week’s topic is, again, on the somewhat difficult side. In every Online Trading Academy class that I teach, the topic of the fundamental strength of world economies comes up. Even though our class’ main purpose is to teach you how to look at charts and earn a few pips from the moves in the markets, being aware of fundamental differences can be helpful especially for the long term traders out there. The main problem comes with spending TOO MUCH time researching the differences in fundamental strengths. This can lead to an inherent bias to either a positive or negative view of the economy in question.
Professional traders make a living from trading what the charts tell us to trade – not our beliefs of economic strength or weakness. Very often the two do coincide, but very often they do not. When economic numbers from whatever source are released, many new traders attempt to immediately jump into the market hoping for a few quick pips. Very often the market punishes these traders as it quickly reverses direction on them! Using many of these numbers to formulate a hypothesis on the strength or weakness of an economy is difficult, as many times these numbers are lies. Oops, I meant revised the next time they are released. Here are a few easy examples:
In this snapshot from forexfactory.com, you can see several bits of economic news releases.
The first column of numbers is the actual release, the second is the expected figure, and the third is the previous release of this data. Notice how some of the numbers in the third column are colored either red or green, with small orange pointers to the right? This means that the number has been revised. What it really means is they gave you the wrong information the first time the number was released, and they have now corrected that data. Their reasoning for this? New information has caused them to revise the previous number. In my humble opinion, if you don’t have enough information to give me the correct figure, wait until you do before releasing this data.
Since many of the economic news releases can be lies, oops I meant revised again, fundamental analysis is often very difficult. In fact, many pure technicians would tell you that fundamental analysis is a complete waste of time as there are so many variables that go into an economy’s strength vs. another, and with so many of those variables being possible lies, the fundamental analyst is at a distinct disadvantage. Technicians know very quickly if their analysis is incorrect – their stop loss gets hit! As a reminder, taking small losses is part of a professional trader’s job; no one makes money on every trade. It is our job to make sure the small losses do not outweigh the larger winners that we are expecting to have.
As far as trading goes, the extent of my fundamental analysis is to merely check the economic calendar to see when information is being released. If the number is important enough, I have a couple of choices in my trading plan. The first is to exit all of my position, and wait for a new entry after the news is released. The second option in my plan is to exit half. If I don’t have a position on, I’ll wait for the news reaction to enter any trades. For further clarification on my trading plan rules, see you in class!
But what about all the economic commentary that is found on the internet? It doesn’t take very long to realize that watching television to get your economic news is an absolute waste of time-unless you consider the pure comedic element. Yes, the main TV business channel is hilarious! Out there on the internet are a lot of websites commenting about how weak the world economy is, what the next disaster is going to be, how we are all going down the drain financially, etc. etc. etc. When you open that Pandora’s box of bad news, it can have a serious effect on your trading. If you read enough of those sites, you may end up hoarding gold and silver, living in the mountains and growing your own food. While this does sound appealing to many, this may not help you trade.
The entire point is this: we make money by watching charts. Using the Online Trading Academy core strategy that is taught in our classes, combined with the reinforcement in the Extended Learning Track rooms will help you do that. What is the core strategy you ask? Selling in supply, buying in demand, going in the direction of the longer term trend. Take small losses and let your winners run. If you spend too much time researching fundamentals, you may get a biased view of what you should be doing on the charts. A negative USD view (for example) will cause you to short every US dollar index rally, even if the trend is solidly up! This will cause the new trader many unnecessary losses. Look at the chart, it tells us what to do! Fundamental views can help, if you don’t get bogged down with biases.
Until next time,
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.