I’ll admit… I’m primarily a technical trader.
I find more value looking at a price chart than I would an economic report or a company’s 10-K.
But that hasn’t always been the case.
Like most traders, I started my career with fundamental analysis because on the surface it makes sense.
After all, there should be a clear link between a market’s fundamentals and its price. But what appears to be logical, isn’t always true.
You see, if markets consistently followed the fundamentals, there’d be a lot more successful traders and investors out there. That’s not to say fundamental analysis is entirely useless.
Fundamentals play a very important role in my own trading… just not quite the way you might expect.
It’s a Two-Step Equation
Fundamental analysis tells me where to look, whereas technical analysis tells me what to do.
Both methods are complementary to one another.
For example, I love trading the currency markets because there’s always something going on. And over the years, I’ve gained expertise on broad macroeconomic themes like central bank policies, trade relations, and fiscal policy.
However, I don’t have to be an expert on Norway’s government spending platforms, or of New Zealand’s agricultural exports to profit off a move from the Norwegian krone or New Zealand dollar.
All I need to know is whether a big move is on the horizon.
If it is, then I need to know where to get into the market and where to get out. Fundamental analysis helps with the first half of this equation.
For instance, if the Reserve Bank of New Zealand (New Zealand’s version of the Fed) has a policy statement coming up, then I know it’ll likely be a market-moving event. Knowing whether the central bank will raise rates, lower rates, or keep them the same won’t help me make money.
To make money, all I need to know is what time the policy statement is scheduled to be released. This is how fundamental analysis tells me where to look.
My next step is to open a price chart of the New Zealand dollar. Technical analysis will show me whether I can expect a higher or lower currency move in the aftermath of the news event.
I analyze the price chart to know where to buy or sell, at which level to set a protective stop loss order, and where I can reasonably expect to exit for a nice profit.
So, technical analysis tells me what to do.
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Finding Your Own Way to Profitability
Think of good trading as a three-legged stool…
Fundamental analysis, technical analysis, and strong risk management are the three legs. If you take any one of those legs away, the stool will fall over.
How you use each of those legs is probably different from how I do it. And that’s okay.
No two traders are perfectly alike. Jeff Clark trades a little differently from me, and I trade differently from Jeff.
What’s important is to be well-rounded, so you can find your way to profitably trade no matter what the markets are doing.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, a Currency Trader member shares their thoughts on Imre’s recent Q&A (paid-up subscribers can access it here).
Hello Imre,
It was informative to learn about your viewpoint on the effect of news on forex prices in your reply to the question posed by Robin R. Many readers may however miss the traditional aspect of which side of the currency pair establishes the movement in the chart.
For the forex market, the pair currency 1 (CCY1)/currency 2 (CCY2) refers to how many units of the quoted currency (CCY2) in one unit of the base currency (CCY1). The strength of the base currency CCY1 therefore determines the up and down of the chart.
In other words, if the currency listed first in the pair is strong, then the chart goes up. If it’s weak, then the chart goes down.
As you noted, for the GBP/USD pair, the up and down of the chart is determined by the strength of the pound, while for the USD/JPY, the chart goes up as the strength of the dollar goes up and vice versa.
For the major currencies, the order of the pairs is traditional. For other currencies, the USD is usually the base currency, but this can also vary.
– Abel O.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.