Thank you, @steve369 for contributing your knowledge. It really is impossible to predict the outcome for a particular market move after millions of traders and the many financial institutions have executed their positions.
The above are key points I took from your insightful comment.
Indeed, I agree. If I was observing such a spike I would definitely issue a buy order.
One problem that I am plagued with is that there are times where I issue the order at the very peak where it then starts to descend and I do not stop the loss thinking that it will resume its upward trend and resort to wait it out resulting in locking my investment for weeks.
This is a very bad trading habit. I definitely recognise this.
@chesterjohn, thank you for your comment, I appreciate you taking the time to do so.
To be honest, I have not yet observed these two trends. I will be on the lookout for this as I believe this is very important knowledge.
The gist of this comment is in parr with that of the other contributors above. And this is one of the main take aways, too. I have to understand that market values incorporate the sentiment of those trading there so that the news being disseminated becomes priced in immediately or nearly so.
In the end, yes, I believe that I should avoid trading on whims hinted by the news and the economic calendar and start looking more into Technical Analysis.
It sounds like you entered your trade based on your bearish bias on the news your read, having the bearish bias by itself isn’t a bad thing but by itself is only one factor for you to base your trade on. You can try to marry other factors like technical analysis to your fundamental analysis, is price action confirming a bearish bias? Is resistance being rejected? You can look for other supporting economic & fundamental factors. Being patient and waiting for market confirmations can also help to shift the odds in your favour.
It is indeed fundamentals that actually drive these markets in the longer term - and speculative trading adds the “noise” that creates all the fluctuations along the way.
I think there are important things to remember when reading fundamentals:
Economic releases are lagging data, and sometimes very lagging! The figures are usually based on the previous month’s data and often include updates to the earlier releases from the previous month. So trying to extrapolate forward from these releases is like painting your windscreen black and trying to drive by only what you can see in your reverse mirror. Which leads to the next important thing…
The markets do not actually trade the data alone. One has to remember that fundamental analysis is actually driven by forward-looking sentiment rather than backward-looking data. For example, what would the markets pay more attention to: a bad set of economic data - or the likely reaction of the government/Central Bank to improve the situation? The answer would probably rest on how credible the market will consider the proposed reaction from the authorities. Sentiment is more important than the facts from our perspective. Which leads to a third point…
One has to remember that when you trade a currency, you are actually trading two distinct products. In your example, both the Euro and the Pound Sterling. Your position is actually based on the relative movements of these two currencies and not just one of them. This means that a negative leaning on one currency might not have any weight if the other currency is feeling some greater positive factors.
In addition, negative/positive factors may often have already been anticipated by the market and “priced into” the current value. Therefore the actual official confirmation of the data will only shift the market’s current sentiment if it widely differs from the anticipated figures. It is worth remembering that all the financial institutions have either their own economic teams, or subscribe to external sources, and have an on-going assessment of fundamental issues.
An additional point is that the markets do not always react to fundamental issues in the same way all the time. There is always the “flavour of the day”. For example, currently the global economies and central banks are focused on inflation fears and any news on that front will be widely noted. Another time, like during the early COVID times, it might be interest rates or other economic stimulation measures. During the Trump era it was the US/China trade wars.
So, all in all, fundamentals are what make trading interesting - but they are not a good basis for selecting trades. They tend to be long term and difficult to select specific and efficient entry and exit levels.
It is my personal opinion that we retail traders are but fly specks on the window in terms of our presence in these markets, and we know virtually nothing about what the markets are actually doing or in which direction they will move next and for how long and how far. And I doubt many major finance institutions or funds have a much clearer view either. No matter how big one finance house is, it is not big enough to dictate market moves on its own.
In addition, market transactions are not all speculative trading. International business base their decisions on market prices and their success is measure by the business operations, not the forex levels. For example import/export business, international mergers and acquisitions and expansions, pensions investment funds, and so on.
But the markets ARE virtually free and unregulated and the current price/volatility does reflect the total sum of all current actual transactions in a relatively unbiased way - and we can use that!
So we can actually trade the fundamentals that move the markets in two ways:
We can study all the available info and form a personal opinion about where price should go. But we know that we cannot access or even process all the info affecting price and we are but one small minnow swimming amongst great shoals of bigger and better and sharper fish than we are and each one of those also has a view of their own - does success in those waters sound very feasible? And is all that study even really necessary? Afterall, the current price is the result of the impact of all, and only, the fundamental information that is relevant to it. All the rest of related info is irrelevant from a trading perspective.
The other approach is: rather than analyse the market factors, let’s analyse the market participants. The markets respond to the majority forces active in those markets. So if it goes up, we know the majority view of the fundamentals is positive, and vice versa. So this is the field of technical analysis.
Unfortunately, many newcomers do not dig deep enough to understand what TA is telling them, and why, and just want a scenario of, typically "a blue line and a red line and buy/sell when one crosses the other" to which they might add: "I don’t care what the lines are as long as it works…"
But TA can tell you a lot about the state of a market. Whether it is active or inactive, ranging or trending, volatile or smooth, strong momentum or exhausted, and so on. But the point is that you are not designing a strategy that has some kind of “magic” in it that tells you your fortune… all it can do is answer the question which you should ask every time you look at your screen:
“What is the majority of active participants doing right now?”
You can even have your own opinions and still apply the same approach, i.e. “Are the market participants doing what I think the markets should be reflecting” When, and only when, your TA shows the market movement is in synch with your own thoughts then you enter a trade - simple.
But the core approach is to build a TA model that can read the price movement and tell you a story of what the majority are doing, or not doing - or in just a few words:
To observe and analyse what the majority of other market players are doing is to use them as you surrogate fundamental analysts for your own trading decisions.
One of the most important lessons I learned is, that news beat technical Indicators, at least in the short run.
If you work with indicators, and they are going to give you a superb buy/sell signal, but during the next seconds published news force the price in the other direction, you can throw your signal in the dustbin…
Never rely on a statistical signal shortly before news release!
Good point and absolutely correct! Indicators do not dictate what the market will do. Indicators only “indicate” what the market is and has been doing, and are usually just a rather sinple mathematical formula, that’s all. They can be useful but in limited ways according to their structure.
Depends on your time frame. Go back in the charts and look at how often the market is back where it was a couple of hours later after a big move up then down. Sometimes it’s unexpected and sticks, but usually it’s just a whipsaw that stops everybody out
Hello @moxietrading thank you for commenting and welcome to the babypips forums.
Yes, I opened that trade with the mind frame you pointed out. And equally correct is your statement that I did not consider any other indicator, irrespective of it being technical or fundamental. The thought process at that moment was that ‘this is too disheartening news to let traders keep their confidence in that particular currency.’
It turns out that large institutions and knowledgable traders had already considered the repercussions of such news and hence had already actioned on the market prior to the release of the fresh values.
Earlier in this thread was explained to me that it is the predicted value that is significant because it shows the sentiment that those same large institutions and knowledgeable traders are taking their stand and as expected they reaped their rewards to the detriment of my expectations and perceived market sway.
Yes, this is advice I shall be heeding, along with that of the other contributors of this thread. At this point, I can say that my style of fundamental analysis cannot be unaccompanied and needs other forms of knowledge (TA, other sources of FA) and, yes, patience too!
@SovoS, as always, thank you for your invaluable contributions which I have dissected and commented on and explicitly asked for more information because while I do my research I have found that the perspective of a fellow trader, who is by far more knowledgable than me, very helpful and an asset.
I must thank you for naming my amateurish approach to trading (speculative). As I progress in this thread I have really understood that my methodology requires, not select refinements, but a complete overhaul that includes improved fundamental analysis and appropriate technical analysis. The latter has so far been neglected in my trading system.
And, indeed, I wish not to remain a contributor to the noise generated during the trading sessions, hence, my continued study of the subject and reading and writing here and there around the forum.
The bolded sentence is so very true! When I expand the economic calendar to read earlier data it is either nonexistent or on a monthly basis. Now have I realised that markets behave just like streams, gently (so-to-speak, when the main markets are closed) or torrential (main markets open) proving that there is no room for redundant data because, essentially, that is what a month-old statistic is.
And another hit to my approach to trading. Thank you for pointing this out. I traded thinking that the action would be on the results of hard statistics rather than on the perceived motion of the larger and more knowledgeable institutions. Henceforth, I shall look at where the sentiment lies and what the forecast data shows since this marks the movement where the hands of the market are seemingly directing their funds.
By relative, I am understanding that both currencies are moving against the Dollar. Is my understanding correct? I am asking as I fear I may have misread and misinterpreted this third point. That is, I have read it many a time and this is the only conclusion I am reaching. So, @SovoS, would you be able to elaborate more on this matter, I would be grateful.
Commenting per my understanding, then, a currency like EURGBP is to be studied in relation to the factors affecting the Euro, those affecting the Sterling, and also those moving their prices with respect to the Dollar thereby adding an extra layer of complication, if I may say so.
My limitation in this regard is that I have always perceived this for the EURUSD and GBPUSD currency pairs. That is to say that if the Dollar was dragging the GBPUSD pair down, then the rate at which this was done would also affect EURUSDin the same manner making EURUSD and GBPUSD temporarily correlated.
This is how I have always understood the relationship between the Euro, Sterling and Dollar which may be very flawed logic, hence my askance for more elaboration on the matter - thank you once again.
The comment in bold is exactly what I meant with my own comment earlier on for points 2 and 3. And it was also the same comment given by many of the contributors to this particular thread… a notion that I was not familiar with until now - which also shows my experience on the matter of being a full-time trader. But alas, this is the reason I instigated this thread, after all.
Indeed, the lone trader cannot compete with the wealth of minds contributing their own to formulate a sound strategy not to mention the ability to pump and retract such considerable amounts of money that these simple gestures affect the markets in a readily apparent fashion.
This was something I was able to notice and comprehend. I like to compare this with the daily hot news in newspapers. For the sake of an example, imagine a national high-profile scandal, the furore and sensationalisation around it. Then give it a couple of weeks and one would question whether that really happened!
In my opinion, this is the main takeaway from this thread. This is the lesson I have learnt in this series of posts.
The preamble to the quoted portion was quite enlightening in trying to get into the collective minds of the large institutions playing this game and also how a small fry such as myself behaves and goes about his thought process, which I have no shame in admitting that my approach was slightly less vulgar than not caring as long as it yielded results in my favour but, yes, I believe you are spot on. The gist is that many lone traders seek a narrow appreciation that only lands them money in their laps on the fly which is a very short-term stream of profit.
As for the bolded and italicised parts, well, what can I say, except another show of appreciation? My task, and I shall presume that there are many like me who should be studying the many gems written here, is to delve deep into suitable technical analysis tools to come up with a strategy that confirms the story being told by the news, the economic calendars and all iterations of fundamental analysis allowing for sound opening and closing of trades. This is effectively the core component I have always had missing from my approach to trading.
For the umpteenth time, thank you @SovoS for your elaborate writings and knowledge sharing.
@Kashmaster, agreed! The approach, as I now understand it, should be a mix of fundamental analysis, technical analysis and reasonable forecasting.
@SovoS, I now feel that TA is necessary to corroborate the story that the fundamentals tell.
@chesterjohn, yes, I was able to notice this, too. A piece of news sways the market temporarily where once its hot perception diminishes so does the sway and the market resumes to its previous current.
No, it just means the two currencies in the trade itself. For example, if you take a long position in EURGBP you are simultaneously buying the EUR and selling the GBP (and vice versa with a short position). Both of these currencies can be influenced by supply/demand factors directly and indirectly related to each of them independently and regardless of the USD.
For example, fiscal and monetary policies may differ in the EU and UK and lead to movements of funds out of one currency into the other. Again, if economic growth expectations in the Euro zone are greater than in the UK it may lead to a shift in fund investment portfolios into Euro-based assets from GBP-based investments.
So the strength/weakness of one currency is relative to the strength/weakness of the other currency in the pair concerned. One could imagine a situation where an external factor is negative for both the EUR and the GBP but its impact is seen to be greater on the GBP. The result would be the EUR appearing stronger against the GBP even though it is a negative issue for the EUR as well.
If you trade commodities like oil or metals, or indices like the DAX, then you are trading a single item. But a currency pair comprises two items, one against the other.
My confusion was because I understood that the two distinct products were EURGBP and EURUSD or GBPUSD. Now that I read and re-read your third point I realise that it only bisected the initial currency pair but your latest explanation gave me more insight on the matter.
This is something I have been doing since day one, however, I was not connecting the dots properly between the relationship and correlation with the markets. In this thread, I have been given tips on how to do that as is your bulleted breakdown of how to go about it.
This is indeed useful for I was researching (and worrying) over each and every piece of news. Whether it being low, medium or high impact I was always trying to predict what was about to happen. In the end, I realised that the forecast values are those that matter because these partially reflect what institutions and traders have factored in in their actioning process.
Agreed, movements are too fast and news aggregate just the same to predict whether today’s action will foster in a month.
So, may I thank you, @tradeforex077, for summarising the approach I should take when trading news.
It’s hard to say what you did wrong in your fundamental analysis if the market reacts against your trade. In other words, what if your analysis was spot on, but the market just happened to react the other because, you know, reasons.
I would encourage you to read The Alchemy of Finance by George Soros. He published his trading diaries in the second half of the book. If you think your (or anybody else’s) analysis is detailed, prepared to be blown away by the precision and second and third-order thinking that Soros does (I believe the term he uses is reflexivity). First, Soros was trading in all markets, not just EURGBP. Second, he is detailing not just economic news but political events (such as groups of politicians meeting to debate deliberately increasing or decreasing the value of their currencies) and other geo-political macro news. Again, this might be overkill, but you will see time and time again that Soros thinks one thing will happen, sees the market react, and then changes positions immediately and follows the market. So, the question I have to ask you is why didn’t you close your losing position and follow the market?
Keep in mind that the forex market does what it wants to when it wants to do it. You don’t and can’t control the market, So I do not see what happened as necessarily an amaturish “mistake”.
DO
Use multiple timeframe analysis to make the best informed decision available “at the time” and go with the trend (but keep in mind that the market is always subject to change)
Make sure to use proper momey management.
Keep and follow a trading plan (and journal)
DON’'T
Don’t get greedy or let fear enter your decisions.
This is a great analogy. I tried trading just the news some time ago. Didn’t go well, and I stopped completely. Now I use the news more as a sign to stay out of the market. Makes life and trading less stressful.
