GBP vs XXX <-- newbie question!

Beginner Questions
1

I’ve been demo trading for a while now and become relatively comfortable with a few indicators that seem popular.

However, I need to learn how to follow news and predict outcomes that I read so much. So my question is regarding the GBP and how people predicted the change with the new Prime Minister coming in.

  1. How do you tell if it strengthens or weakens against other economies ? Or do you have patience and see which way it goes and risk getting caught in a whipsaw ?

  2. How long would one expect a trend from something like this to last ? Is it hours, days, weeks or months ? I know other policies will effect it, but for now just the change in government question if possible.

  3. Let’s say a president/prime minister said something incredibly stupid regarding economic policy, what would you expect to happen to that currency over then next day or two ?

Thanks, I hope my questions aren’t too vague !

2

All of your questions can be rolled into one question: How is fundamental analysis applied to the currency market?

Most of the people on this Forum are technical traders, not fundamental traders. So, if they were to address your question, their answer would have to be: I have no idea.

Technical traders basically use this methodology:

(1) we almost never know all of the forces driving price in a particular market,

(2) we have found that it is impossible to consistently predict how the market will react to specific news events, and therefore

(3) we believe that it is impossible to predict, at any time, the direction of the market or the duration of any trend

What we do instead is wait for the major players in the market to reach a consensus among themselves about the correct price level, under present conditions. When the major players have decided a direction for the market, we try to follow them in that direction.

Having said all that, there are fundamental currency traders. In fact, there is a forum here on this site devoted to fundamental analysis and discussion. You might ask your questions there.

Kathy Lien has written an interesting article on factors that move the currency market. I’ve attached the .pdf of her article, below.

Investopedia has a similar article by Boris Schlossberg and Kathy Lien:

Investopedia - Free Report - Five Key Factors that Move the Forex Markets

Most of us have studied these articles, and most of us agree that they provide interesting background information. But, using them to make successful trades on a consistent basis has proven to be impossible.

No doubt, Kathy Lien would strongly disagree with that opinion.

I don’t agree with traders who mock fundamental analysis — I’ve heard it referred to as fuzzy-mental analysis. That’s a funny expression, but not very helpful when you’re trying to decide how to trade.

There is no question that both technicals and fundamentals move currency prices. In both cases, the problem for us little guys is that it’s the BIG GUYS who decide which technical factors and which fundamental factors to react to.

We can try to out-guess the BIG GUYS , but we play that game at our peril.
.

Lien - What Moves the Currency Market.pdf (833 KB)

3

You rock, I hope you know that.

Reason why I brought that up, was I’ve been going through past major events at specific times (declaration of war, new presidents, natural disasters etc etc) and saw how the currency was affected and I could not figure out how to predict which direction.

Now I know you can’t :wink:

Thanks again mate, really appreciated.

4

You are so right, Clint! That is exactly what I thought when I read his question.

I have no idea how the market will react to any kind of fundamental news, and I don’t care! The only use I have for fundamentals is to tell me when to stay out of the market…

5

Ha ha. That seems to be what I’m going to end up doing. If you can’t predict with a high level of certainty then rather don’t risk it.

Oh yeah, you rock too phil :wink:

6

I also recommend you the read the book Sentiment in the Forex Market.

I’m not a fundamentalist at all, but this book will help you understand what’s behind fundamentals.

Many probably won’t agree with it, but to me it totally makes sense.

In a nutshell, there’s no correlation at all with the outcome of a news report and market direction, and many times the reasons given by the professionals of a market reaction to a specific report are made to fit what happened, but they never can forecast what will happen. So no need to break you head trying to figure out what will happen next.

All in all, market thinks by itself, and it’s product of the psychology of the herd, so in my opinion it’s very hard to predict with accuracy the direction of the market just by fundamentals.

A great fundamental tool that you can apply with your technicals is the COT report. The Babypips school has a very comprehensive section about it. Give it a try

Last but not least, I’d also like to recommend you to read about accumulation and distribution phases in the market. It’s a great way to understand how the big players play.

After that I think you’ll convince yourself of what Clint and Phil838 said, use news reports to know when to stay out of the market.
:slight_smile:

7

The problem with looking at the market reaction to fundamental events is that you generally are failing to take into account the fact that the markets are already anticipating something. The reaction will come as a result of how close to or far away from expectations the actual news or data is and how the market was positioned going into it. For example, if the market is already very long, the most positive data in the world probably isn’t going to push it higher because there’s no one left to buy.

That said, I totally agree that there’s a lot of hindsight analysis. The media is great for that, but they get it wrong as often as right.

8

Excellent post Clint. Explained how I feel about fundamental anaylsis, even though I didn’t realise that’s how I felt until I read your post! :smiley:

9

houh. thx for awesome thread…i think i have to hit books on fundamental analysis