How do you integrate fundamentals into strategy?

Beginner Questions
1

Hello all,

Tony here struggling away at making a breakeven month :slight_smile:

Many of you, from what I understand, are technical traders primarily. Problem is, since I am learning to trade the Euro during the 8 am to 12 pm window, where data releases and unexpected news blows markets out of the water, its obvious I need to keep the fundamentals in mind. Iā€™m also learning to swing trade, and it also seems that a fundamental thesis is a good idea. The real reasons markets move, after all, are fundamentals.

As far as Iā€™ve been able to figure, its obviously not possible for us to get the news in advance. By the time we see our brokerā€™s emails or hear Betty Liu on Bloomberg, big boys on Wall Street already have their orders filled at a good price and we see huge candles and wide spreads, where price is jumping +/- ten pips in a matter of seconds, doing multiple fakeouts, you name it.

Some news we can anticipate in advance, like todayā€™s GDP, Non Farm, consumer confidence, PPI, etc. But sometimes Moodyā€™s decides to go out and do a downgrade, or someone from the ECB says something about Greece, and we have no idea where this stuff comes from - we just see the charts explode. The only way you can figure this stuff out on time is if you subscribe to all the news channels in the world and have agents surrounding the ECB building with radios. You can end up lucky and on the right side of the trade, or the wrong side - both have happened to me.

So my question is this. Since we already can establish that a) news that is a surprise will result in a very quick change in price which will force us to chase if we want to get in on it, and b) we likely donā€™t have any edge over Wall St. analysts to predict the outcome of a data release (I mean, we can take a bet either way, but where is the edge then?), where is fundamental analysis helping us? I open up the Wall St. journalā€™s currency section, and it tells me what ALREADY happened, speculating on WHY, after which it gives me the opinion of bank analysts who are talking their book. How do I use this information?

Then, if we back out to a more long term view, we are once again faced with a dilemma. Iā€™m reading economic reports about a countryā€™s interest rates, political situation, etc. Everyone else also knows this. Analyst consensus is already well known. The market is falling or rising in response to this information that is already available. I already see that in the price. Where and how do I use the fundamental information to confirm or reject my trading idea?

As Iā€™m learning to develop an edge in the technicals, I also want to develop a fundamental edge. Any help would be appreciated!

2

My two cents:

Fundamentals is a ā€œguiding light.ā€ It provides the direction for you trade. For instance, if sentiment towards the euro is extremely bearish, it means that it could easily fall on bad news, and not rally much on good news. We saw it in the past couple of months, where any ā€œgoodā€ economic data would just serve as a chance for the bears to jump in at a cheaper price.

Of course, this also meant that if so much bad news has already been priced in, a little bit of good news would lead to a super rally. We it this week, Spainā€™s rating was downgraded yet the euro didnā€™t find much sellers. Thereā€™s just noone left to sellā€¦ The euro ended the week higherā€¦ maybe on profit taking because it was the end of the month/week.

With the said, fundamentals is more suited for swing trading where you hold positions for days or even weeks. I mean look at the Aussie for the past couple of months, itā€™s been rising day after day just on interest rate hike expectations! I think with proper research, you can do your own analysis and actually make some predictions on where price is headed.

Everything we need as retail traders, I think, is available in the world wide webi for FREE! Yes, free! We have all that we need! Unlike prop traders, we just need to exert just a little bit more effort to find them.

3

I have a theory about all this which I would like to know what other people think, ok this is my theory.

I had been thinking about indicators like the macd and what they indicate and why, and I came to the conclusion that as they were developed many years ago long before the internet they must have been a way for traders to intercept big market changes without having any access to the news untill it filters through many hours later.
The way I thought this would have worked is the divergence indications, the regular moving average indication would have been a representation of the typical price movements but then the regular price movements are interupted by a sudden reversal due to a news release that the average trader is unaware of.
This is where the divergence would come in, it shows a divergence occuring between the regular price movement and the new sudden change due to a news event so the trader could trade accordingly.
Although I havent exactly tried to see how well divergence corrolates with unexpected news releases it might be a way to kind of see them without actually seeing them ?

Would this be a correct interpretation or not ?

4

well, Tony, Iā€™ve came across this question as well, and Iā€™m sure many of us did.

The answer lays in your trading style, actually.

the way I see it, you can use fundamentals in two ways:

  1. Micro - have your own prediction according to your own studies to a specific report outcome.
    The Micro approach is a bit tricky. Basicly, what you need to do, is have more accurate forecasts than the majority of analysts. this one - I usually stay out of, unless Iā€™ve done some serious studying, or know something other donā€™t (never happend yetā€¦) . The reason for that, is as you said yourself: the guys at wallstreet usually arenā€™t less educated and may have more resources than you and me. I donā€™t want to play ā€œlets see whoā€™s more accurateā€ with them, unless Iā€™m certain.

  2. Macro - Use what you know on the longer time frames.
    This one is what Iā€™m using most of the time. if youā€™ve read the reports, and noticed, for instance, a steady drop in unemployment rate, and a steady rise in the housing market and Core PPI (just an example), you can use this information to have a better idea of where price is going in the next, say, 6 months. Constant positive reports mean the currency is heading north. These are the real forces moving the market. Just trade higher TFs to benefit from it, without having to ā€˜guessā€™ if a single report is gonna make\break your day.
    If reports have shown signs of market expansion on one currency, and market contraction on another (for quite some time), itā€™s HIGHLY LIKELY to see a continuation of the existing trend for the upcoming months.

Just stay vigilant. Keep reading them as they come, to make sure the reports still are, by the majority, headed in your way.

Hope this helps,

Parsush

5

hello Tony

if you dont mind i would like to add my thoughts too.

first, i believe while fundamentals might be a good way to trade, it serves better the funds with large capital. part because they have better industrial connections, and often a large group of analysts to work on the theories, part due this connections they have access to ā€˜better infoā€™, and part because they aim for less profit % with much less leverage as well, unlike us little private traders.
i believe in technical analysis we tend to have a slight adventage though, as we can place orders easier, since moving less capital, and dont have to face to problem with liquidity usually, whereas a fund dumping 500 million dollar as a SL would come with a rather big slippage. funds have to scale in and out, when you can place a trade with ease.

So, i think if you dont intend to be a carry trader, then fundamentals has less an effect on you that you might made believe.

let give you an example:
EURUSD. the USD is bullish on the long term vs EUR. so, take this week: knowing this fundamental info, you short EURUSD when break the 1.3150 support line, say get into position at 1.3140ā€¦and soon enough find yourself with 150 pips+ DD, or a SLā€¦but why to have SL when you go with fundamentals, and to be honest it is so clear that USD will keep gaining ground on the long run.
On the other hand, the technical side was a failed breakdown, and you could profit on that here and now, buying the reboundā€¦
you dont have probably the capital or the willpower to stay on for the fundamental trend, so, it might as well mean little, or bad me, maybe nothing really.

and if i may be a little personal:
i read the forum for a long while, only avoided posting. i followed your journey from the beginning too. all my respect for the willingness to learn, and i really hope soon you will turn to a profitable trader.
however, i think you might times overdo on this willingness, and too fast to jump to new things. all i can suggest that try to use a bit more patient. i know couple of ā€œtrading systemsā€ that consist little else than a moving avarage or an indicator, some chart pattern, or such, and while being basic looking works incredible well, ie. perform better than your sought after 10%+ consistantly.
I would bet with you that you know already all the ingredients you need to make your trading profitable, only the mental part you need to put together, and stick to something that works. but to find what is it for you isnt the way to just jump from one thing to another. had a friend who did just this, took him a while to understand that you dont need to have a fancy system to make money, and that what forex is about: to make money!

sorry if i got long, or too personal. only hope you see the point in the above.

6

Thank you all for your advice thusfar, its helpful.

The problem is that when thereā€™s a good entry opportunity, its usually during a pullback, and pullbacks often coincide with news that is not very positive. My problem is that you never know, unless you are a very good analyst, what news is really important, and what is not. I guess this is where you have to read several articles and get a general consensus?

Also, can anyone go through a specific example of how they would use fundamentals in a given trade? Iā€™m just curious how you do itā€¦

No need to apologize! Iā€™m out to make money so useful advice is exactly what I need :slight_smile:

I tried to completely ignore fundamentals at one point, but I found that what happens is some news event comes out and Iā€™m screwed, basically. I can trade outside the news, but even if Iā€™m not interested in the news, the news is interested in me! Many day traders, from what I understand, rely on news to set the market into motion and to catch a solid trend. Days without news tend to be noisier from what I understand. Most swing traders that I hear of are also big on fundamentals. Basically, I feel that if I donā€™t know what other traders are thinking, its like Iā€™m fighting with one hand tied behind my back.

The technical ingredients that I need Iā€™m beginning to refine more and more. Iā€™m centered on price (candlestick shapes), support/resistance and trendlines, fibonacci, pivots, and a moving average for general orientation. My problem is creating a set of entry conditions for each kind of trade - breakout, reversal (this one seems particularly important because I see a lot of reversals in intraday movement), and range.

From everything Iā€™ve read and seen all technical indicators lag. Iā€™ve tried both the stochastics and the MACD, and they just tell me whatever the price is already telling me, so in that regard I find them useless. Too many systems that Iā€™ve come across always have some kind of indicator as a ā€œconfirmā€, and I have a problem believing in a system like that.

Thanks again to everyone!

P.S. If anyone is interested in observing my struggles with the market, I have a meetpips blog at Tony I. ā€” MeetPips.com

7

i dont consider an individual news to be fundamental trading.
price dont move in straight line, so, a little zig here or zag there when there is a news, is very normal.
thus i referred to you vs. no or little leverage fundsā€¦you only can get hard hit trrying to stay if for a trend, while they dont really feel 100 pips move while in for the long run for 2000 pips ( and with the balance that permits them to do it).

about your last lines:
maybe when you finally will get the ā€œconfirmā€ part, that is when you start to see more profit? :slight_smile:
i dont know. i just made a post on another thread regarding breakout trading, and some confirmation when not to trade, but fade those. you might find it useful, regarding this confirmation thing.