I think I�ve gotten pretty good at locating trends through charts and stuff but what I�d like to know is how you identify the start of a fundamental trend. Like right now I�m having hard time deciding where the dollar is going to go which makes it hard for me to come up with a directional bias on the majors.
I know the dollar is weak but at the same time it�s not entirely dead which makes it hard for me to decide whether not to buy or sell the buck.
I�d like to hear everyone�s opinion on how you detect fundamental trends. I think this is a tough topic to tackle since the economy is so hard to pin down. Should be an interesting discussion!
To tell you the truth, I don�t even really look at the economics aspect of it. Instead I try to watch and see how the market reacts to it. Often times I think the market lags behind the actual fundamental data and it�s because of this reason I like to wait and see when the market finally catches up. I read economic reports, come up with a directional bias based on the reports and then I wait until I see the markets actually responds to the fundamental trend before making my move.
Inflation and economic growth! I think those pretty much give you your trend. If both are high then watch for a strong dollar rally. If only one of them is booming, then look for only a moderate or even range bound move. If both are declining, watch for a drop!
It seems lately that traders are ready to commit one way or another, which is probably why we’ve seen low volatility and a lot of range bound trading for the past few months. For now I would stick to only range bound plays, at least until we get past the holiday season.
Disecting and analyzing fundamental data is not easy, and even the “experts” out there don’t always get it right with their predictions. What it all comes down to when trading currencies is interest rates. So when you analyze data think about how this information represents growth in the economy and how an economy’s perceived growth will affect it’s central banks decision on interest rates.
We can look at the US dollar as a recent example. Since Oct '06 up until recently, the market’s focus had shifted from inflation to the housing bubble and a slowing economy. This led to speculation that the Fed will cut interest rates in early 2007, and the dollar dropped all throughout October and November. The value of the dollar was pushed down even further as the central banks for the other major currencies (JPY, EUR, GBP) were getting set to raise their interest rates. Recently, we’ve seen US data (Retail sales, ISM services sector, etc) support the economy and shifted speculation that the Fed will not cut rates until later 2007, and the dollar has rallied accordingly.
So, as we watch interest rates shift or the speculation of interest rate changes by the market, so does the value of the currencies shift.
Now, this is all longer term stuff and you would only have to dig this deep into reports and trends if you hold positions longer than weeks or months, but knowing the process can definitely help you pinpoint market turns.
I hope this makes sense as I have tried to keep it simple as possible. If you have anymore questions please feel free to ask. Good luck and good trading everyone!