Fundamental analysis

Whilst I place a deep importance on technical analysis, all of my trading decisions are based on trying to understand the ‘fundamental cause’ behind a big move.

I’ll frequently post my thoughts on the fundaments of the ‘major currencies’ and I encourage you to post your own thoughts or ask questions.

Happy trading!
John

TUESDAY 11 MARCH.

A sense of calm returned to the European session following yesterday’s ‘negative price action’. But whilst the VIX remains above 25 and the ‘US economy uncertainty’ narrative remains, it’s difficult to have faith in the continuation of ‘risk on movement’.

Today’s jolts data and particularly Wednesday’s CPI data could contribute to a 'changing of the narrative. But until something does change and the VIX falls, I’ll continue to hold the view any ‘commidity currency strength’ is likely to reverse at resistance.

With the candidates for a ‘long’ being EUR, JPY or GBP. Can you include the CHF on the ‘long list’?..whilst the VIX is at 27 I couldn’t argue against CHF long.

Psychology: Holding a trade you don’t want to be in.

I often get asked, how long do your trades take to complete? My answer is anywhere between 1 and 36 hours. Ideally the aim is for a trade to complete within 24 hours and my average completion time is 16 hours.

A couple of weeks ago I placed a CAD CHF long trade which took over two days to stop out. And it does open up a psychological point I think is worth making…

When I’m placing a trade, it’s based on the narrative of the moment, the longer the trade goes on, the greater the chance of the narrative changing.

On this occasion, deep down, my preference was for ‘long’ AUD or GBP Vs my ‘short’ currency of choice (at the time) CHF.

But I chose the CAD to long due to the fact the AUD and GBP charts had already risen too far to place a stop loss behind a 1hr swing, plus Canada had just reported higher than expected inflation data. At the time, I felt it was a shrewd decision. And if I was put back in that moment, I still think I would make the same decision.

But, two days later, the trade came close to the profit target but is now going sideways, whilst an AUD or GBP trade would have (more than likely) hit profit.

At this point, what do you do? The trade is going sideways and if anything, looks like it’s going to stop out. And you are now noticing other potential trades.

First and foremost, it’s mathematically sound to simply wait. Let the trade play out and form a fresh opinion once it’s completed. And actually, that is my recommendation. Just continue to keep on top the market narrative and be ready to trade again when the time is right.

But…there is a case to say that after two days or longer, if the narrative has changed and you have genuinely identified a new opportunity. You could close the original trade to place a new one. Just be aware that this method leads to a slippery slope of emotion. And if you find yourself doing it on a monthly basis, I would say stop. To give you an idea, off the top of my head, I can recall two occasions over the last five years I’ve felt the need to close one trade with a view to opening another. And I would suggest at least 18 months of consistent profits behind you before you even consider it.

At the end of the day, you placed the original trade with good reason. And ultimately, the difference to the account by the end of the year would be so negligible that ‘closing a trade to place a new one’ is probably, although viable, not worth the potential spiders web of emotion that comes with it.

Ultimately, the reason we use a higher risk reward ratio per trade is to allow for half of them to lose.

That’s my thoughts on a trade that has ‘gone on too long’.

What about a trade that is doing well but you’ve identified a new opportunity?..I’ll offer my views on that very soon.

LIVE TRADE.

Buy stop order EUR CAD.
Entry: 1.5769

It’s a ‘relative fundamental’ trade. Based on the CAD’S ongoing woes and the recent positivity coming out of Europe. The theory being, if the chart pushes up and triggers the order, I think the chart has logical reason to revisit the recent high.

It’s a 50 pip stop loss with 75 pip profit target (EUR CAD) has a fairly high ATR.

The risk to the trade is the ongoing uncertainty surrounding tariffs. Plus the fact it’s very early in the trading day.

I will later make a decision on whether to close the trade pre US CPI (if it triggers).

MARKET OVERVIEW.

Last week I noted it felt like there was still a bit of negativity to be ‘flushed out of the market’.
I’m now starting to get the sense negativity has peaked and very soon, we could be back to ‘risk on soft landing trades’. Helped by today’s benign CPI print, the growing expectations for FED rate cuts. And (my personal hope) the market is growing tired of tariff shenanigans.

Currently, I’m watching the CHF charts and looking for ‘weak CHF power breaks’ followed by 1hr support forming in conjunction with the VIX falling.

Of course, by this time tomorrow, the VIX could be up to 30 and I’ll look a bit daft.

In other news, the BOC again cut rates, with neutral / dovish(ish) forward guidance. There becomes a point when Canada can’t cut rates anymore due to the risk of stoking inflation. But for now, I continue to hold my ‘dovish CAD’ bias.

Yesterday I offered my thoughts on ‘holding a trade you don’t want to be in’. Keep an eye out for my thoughts on ’ what to do if your trade is going well but you’ve spotted a fresh opportunity’. Depending on how many cups of tea Michelle requires me to make for her, I should be able to send my thoughts before the weekend.

Please feel free to offer any thoughts or ask questions You might have a different opinion than me.

Thursday 13 March: Uncertainty continues.

As things stand I’m finding it very difficult to have confidence in the near term direction of the currencies and the risk environment.

I am ‘slightly optimistic’ perhaps the negativity is overdone. And we could see a positive environment next week. But we remain only ‘one tweet away’ from chaos.

Currently, I’m keeping an eye on the VIX. If it remains high, I’ll continue to look for 4hr support and resistance ‘risk off trades’. For example, CAD JPY.

Or, if the VIX falls with a rising S&P and positive narrative. I’ll revert to my preferred ‘risk on’ trades. CHF (or JPY) short.

Unfortunately, I have to attend a funeral tomorrow so I won’t be trading.

Wishing you a pleasant weekend. Weekly review and "how to take advantage when a trade is going well’ to follow.