Is Fundamental Analysis a waste of time?

[CarlosRay]

Fundamental analysis is [I]not [/I]the same thing as news trading. It is [I]not [/I]about taking a speculative position on the outcome of one specific event. It is about forming a broad view on the longer term flow of real funds into and out of various currencies based on an analysis of on-going data concerning industrial and commercial progress in various countries as well as the global movement of huge investment funds, which can be based on a multitude of factors.

It is worthwhile for traders to remember that there is also a world where real money is moving. If an economy is doing well then it means that companies are selling their products well both domestically and abroad. Often these trades are priced in USD even though the US is not even one of the trade partners involved. Whenever commercial business is performed in foreign currencies there are forex transactions involved. And these are often repeated when company receivables are domiciled back into domestic currency. The more commercial activity there is then the more currency transactions take place. And when this commercial activity grows more in one currency region than another then there is a net flow of currency demand into that region and so on.

Investment and pension funds move huge sums globally and gradually. They are influenced by interest rate differentials, currency movements, changing geo-political risk factors, changes in industrial trends and company growth perceptions and many other considerations including environmental concerns and even ethical, religious and moral factors.

The actions of private, retail speculators is an entirely different layer on top of this underlying, constantly rolling, ocean of wealth. And the objectives of this speculative layer of traders is usually far from benefitting from following the relative changes in the long-term trends in economic cycles between different economic and currency regions. Their objective is to make money and to make as much of it as possible, as quickly as possible, but within a structured risk management model.

For this reason, it does not seem to make any sense for a retail trader to try and formulate speculative trades, whose only purpose is to optimise profits, on an individual fundamental analysis, where even all the information available cannot even be included in that analysis. On the other hand, by watching the price itself, one is actually watching the end result of both everyone else’s fundamental analysis [I]and [/I]the pressures arising from the actual movement in funds in the real commercial markets.

Naturally, short term charts do not reflect this activity directly. They are greatly swung by the vast mass of technically-based speculative positioning that is constantly being triggered as the price moves up and down. If one thinks of all the MA’s, all the fibs, all the S/Rs, all the oscillator signals etc etc etc in each and every time frame from single ticks to 1 hour and then add to that all the various stoploss and target level policies of all the active traders and automated programs constantly watching the markets then there is surely a reason at every single tick for someone somewhere to buy or sell at that level.

Therefore short-term trading is really nothing more than a computer game where you try to guess whether to jump or duck with the next short move. When you are right you make pips, when you are wrong you lose them. It has absolutely nothing to do with “Fundamentals”

If one trades on daily charts then one is closer to identifying longer lasting trends based on more substantial real factors and the movement of real funds. But even daily charts do not move smoothly and include up days and down days within any move. So, once again, we can benefit by technical analysis to help eliminate the “noise” and “clutter” in movement and identify the core direction within it. Technical analysis can help identify whether a particular move, or set of moves, is significant regarding a possible change in direction or not.

Just some ramble on a Saturday evening…

Quite some post!
So, would I be correct in thinking that fundamentals create the trends, whereas technicals seek to take advantage of them?

[anon46773462]

So, would I be correct in thinking that fundamentals create the trends, whereas technicals seek to take advantage of them?

Yes, at least in my opinion, the fundamentals are the core basic real factors affecting movements in currencies, stocks, commodities, etc. By identifying and measuring the relative strengths, weaknesses and movements in these factors one should be able, in theory, to estimate the changing pressures in the supply and demand for the various products. But, in practice, that is not so very easy - as the variations in expert opinions adequately reveal!

Technicals can, again in my opinion, reveal the core movements taking place in any market and facilitate taking advantage of them.

For example, if one has a fever, then the symptoms reveal its presence and one can conclude that one’s temperature will rise and eventually fall - but it is easier to track what is actually happening and when the temp has peaked and is actually turning down again by regularly tracking it with a thermometer…

[PipMeHappy]

Great post, Manxx, as always!!!

[anon46773462]

Great post, Manxx, as always!!!

Thanks! Nice and very relevant topic! Makes a change from reading about which broker and how to change USD20 into USD 1mill…

[rhodytrader]

So, would I be correct in thinking that fundamentals create the trends, whereas technicals seek to take advantage of them?

I would say fundamentals create the broad trends - the ones that operate over months or longer. In the shorter term, it’s actually possible for technicals to drive trends. Momentum begets momentum.

[peterma]

I suppose the technicals are happening every moment of the trading day, yet we have to wait for the fundamental set up, maybe for weeks.

Most recent scenario is the BOE rate announcement on Aug 4.

The NFP numbers next day were open to doubt, the BOE was the opposite - the Bank made it clear since Brexit that it would have to act, the pmi numbers since that announcement merely confirmed the set up.

So simply going short on the morning of Aug 4th trading on hr1 without even looking at a chart was the short term play.

[thefisherman]

Fundamental analysis is [I]not [/I]the same thing as news trading. It is [I]not [/I]about taking a speculative position on the outcome of one specific event. It is about forming a broad view on the longer term flow of real funds into and out of various currencies based on an analysis of on-going data concerning industrial and commercial progress in various countries as well as the global movement of huge investment funds, which can be based on a multitude of factors.

It is worthwhile for traders to remember that there is also a world where real money is moving. If an economy is doing well then it means that companies are selling their products well both domestically and abroad. Often these trades are priced in USD even though the US is not even one of the trade partners involved. Whenever commercial business is performed in foreign currencies there are forex transactions involved. And these are often repeated when company receivables are domiciled back into domestic currency. The more commercial activity there is then the more currency transactions take place. And when this commercial activity grows more in one currency region than another then there is a net flow of currency demand into that region and so on.

Investment and pension funds move huge sums globally and gradually. They are influenced by interest rate differentials, currency movements, changing geo-political risk factors, changes in industrial trends and company growth perceptions and many other considerations including environmental concerns and even ethical, religious and moral factors.

The actions of private, retail speculators is an entirely different layer on top of this underlying, constantly rolling, ocean of wealth. And the objectives of this speculative layer of traders is usually far from benefitting from following the relative changes in the long-term trends in economic cycles between different economic and currency regions. Their objective is to make money and to make as much of it as possible, as quickly as possible, but within a structured risk management model.

For this reason, it does not seem to make any sense for a retail trader to try and formulate speculative trades, whose only purpose is to optimise profits, on an individual fundamental analysis, where even all the information available cannot even be included in that analysis. On the other hand, by watching the price itself, one is actually watching the end result of both everyone else’s fundamental analysis [I]and [/I]the pressures arising from the actual movement in funds in the real commercial markets.

Naturally, short term charts do not reflect this activity directly. They are greatly swung by the vast mass of technically-based speculative positioning that is constantly being triggered as the price moves up and down. If one thinks of all the MA’s, all the fibs, all the S/Rs, all the oscillator signals etc etc etc in each and every time frame from single ticks to 1 hour and then add to that all the various stoploss and target level policies of all the active traders and automated programs constantly watching the markets then there is surely a reason at every single tick for someone somewhere to buy or sell at that level.

Therefore short-term trading is really nothing more than a computer game where you try to guess whether to jump or duck with the next short move. When you are right you make pips, when you are wrong you lose them. It has absolutely nothing to do with “Fundamentals”

If one trades on daily charts then one is closer to identifying longer lasting trends based on more substantial real factors and the movement of real funds. But even daily charts do not move smoothly and include up days and down days within any move. So, once again, we can benefit by technical analysis to help eliminate the “noise” and “clutter” in movement and identify the core direction within it. Technical analysis can help identify whether a particular move, or set of moves, is significant regarding a possible change in direction or not.

Just some ramble on a Saturday evening…

Smart dude , the force is strong with this one

[m.k.a]

Give my vote
No its not waste of time!

[anon46773462]

I would say fundamentals create the broad trends - the ones that operate over months or longer. In the shorter term, it’s actually possible for technicals to drive trends. Momentum begets momentum.

I think you are absolutely right here. And it is usually these short term moves that create the opportunities that short-term traders look for. Of course, it is debatable whether one can call these types of moves “trends” or not, but they are usually triggered and terminated by technically-based operations.

Nowadays, with the availability of the same indicators on all trading platforms, and a vast range of easily accessible commentaries, there is a clear tendency for traders’ and trading systems’ action levels to accumulate around, and focus on, very specific levels such as Fibs and S/R levels.

In the short-term, these concentrations can provide strong, follow-through impetus to moves when they are in the form of breakouts or triggers - and can stop them on the spot as they reach a commonly-observed “stop”, “profit” or “reverse trade” level.

What is only price “noise” for a long-term trader or investor is the bread and butter of the short-term trader.

[PipMeHappy]

What is only price “noise” for a long-term trader or investor is the bread and butter of the short-term trader.

I absolutely agree with this point; of course, a long-term trader must still pay attention to

the ‘noise’, because something like the Japanese tsunami or the September 2001 attack

can sometimes generate profound movements - whether or not they can generate market

reversals it remains to be seen, but even long-term position traders would need to be

on stand-by when such moves take place.

[PipMeHappy]

PS: we all have and will always have individual preferences in terms of what we use for determining directional

bias…

Some people swear by oscillators (RSI, MACD, Slow Stochastics, etc.); some people will use retail volume

indicators; some people will use the COT report; some people, again, will use the VIX to determine market

quiet as an opportunity to short or a peak in ‘fear’ as an opportunity to go long (for example)…

It is up to each of us to get familiar with a handful of tools that make sense for our trading style over time,

and to use them (hopefully) to our advantage…

The bottom line is: no one tool will work for ever, in all situations…

[m.k.a]

I remember a once there was news dealing with oil production from russia and iran and usd was falling 200 - 400 pip slow and steady

That was great and i went max all in risk , nothing was stopping me to get that profit , simply price momentum was reacting to that news

The price go boom boom down - stay - boom boom down - stay -… No bounce back all way down )))

[m.k.a]

Sometime all i need two or three of these news a year

[anon46773462]

I absolutely agree with this point; of course, a long-term trader must still pay attention to

the ‘noise’, because something like the Japanese tsunami or the September 2001 attack

can sometimes generate profound movements - whether or not they can generate market

reversals it remains to be seen, but even long-term position traders would need to be

on stand-by when such moves take place.

Yes, there are such events from time to time and, whilst they are single events, they may well lead to longer term impact on currencies, stocks etc.

This leads us to an interesting question that I confess I have no answer to: how does a pure fundamentalist trader decide at what level to take profits and at what level to concede they were wrong and close out? I.e. without any charting?

[anon46773462]

I remember a once there was news dealing with oil production from russia and iran and usd was falling 200 - 400 pip slow and steady

That was great and i went max all in risk , nothing was stopping me to get that profit , simply price momentum was reacting to that news

The price go boom boom down - stay - boom boom down - stay -… No bounce back all way down )))

Nice courage! You are right of course, that such major events occur from time to time and it is the sharp trader that catches them in time and has the guts to stick with it. Well done!

However, it takes a lot of experience to see such potential and manage it. It always a risk to place too much on such measures especially if one is trading for a living. The number one issue is always that you can still trade tomrrow…

[PipMeHappy]

Yes, there are such events from time to time and, whilst they are single events, they may well lead to longer term impact on currencies, stocks etc.

This leads us to an interesting question that I confess I have no answer to: how does a pure fundamentalist trader decide at what level to take profits and at what level to concede they were wrong and close out? I.e. without any charting?

That is the million-dollar (or, adjusted for inflation, billion-dollar) question: when is good research

leading to trading doom?

There will be times when a good strategy is wrong because ‘the market’ behaves in a new way

and you may be on the wrong side of it; perhaps your approach was not wrong and you will be

right other times, but maybe that one time (which could be a single trading week or even a year)

you end up net-negative.

I have held down my GBP/NZD long to about -6000 pips, as it is well known to those who see my

posts on here, and I can say that I have definitely broken all standard rules of trading, but, hand

on heart, I am trading my own strategy here, so as hard as it may seem to justify it to others, I

am comfortable with it, because I am yet to see something solid to change my view on this:

yes, Brexit was not part of my trading fundamentals when I formed my view on GBP/NZD, so

I had to do a lot of thinking around this and in the end I decided that what has changed is not

the fundamentals around Sterling in relation to Kiwi in the long-term, but the time horizon for

my target and capitalisation needs for my trade.

I have acted and reacted on the new environment and I am happy with what I have done so far,

although if you looked at MyFxBook (see thread in Forextown, Page 1) you would tell me to go

and find another hobby and give up trading like this, for good.

[anon46773462]

I have acted and reacted on the new environment and I am happy with what I have done so far, although if you looked at MyFxBook (see thread in Forextown, Page 1) you would tell me to go and find another hobby and give up trading like this, for good.

Well, it is not in my nature to tell anyone to do anything But there is a very interesting and relevant point in what you are doing. Most people who come to this site talk about making money and avoiding losses. Whilst that is ok, it is also a very narrow window on the world of money and economics. Whilst I might feel that using fundamental analysis is not useful in trading for profits in the shorter term, that does not mean that fundamentals are not interesting!

I take a great interest in following various economies and global activities in general are extremely exciting in many ways. As well as following economies I also collect (rather slowly) paper bank notes which is another fascinating window upon various countries’ developments through history - as looking at many African banknotes will demonstrate!

I think a major issue here that your post raises is the question of [I]why [/I]we trade. If one is aiming at earning a living from one’s trading results then I suspect you would not recommend to them to follow your example (so far)! But if one is interested in following fundamentals and taking a personal view on them, and also wants to put a money position on it, then I think your approach must be very rewarding and extremely educational - which is your substitute reward instead of just gaining profit.

You do not rely on your trading for your living and you are not gambling your life savings, so the cost of your interest is only in the same league as, say, a golfer who invests in his equipment or a traveller who pays to go and see other places. It is not a loss, it is what people invest in their own hobbies, interests and pastimes. In your case, it is a keen interest in economics and currency movements - and if you make a profit then so much the better, but profit alone does not necessarily need to be either the objective or the criterion for your positions!

Having said that…-6000 pips! huh!!!

[PipMeHappy]

Well, it is not in my nature to tell anyone to do anything But there is a very interesting and relevant point in what you are doing. Most people who come to this site talk about making money and avoiding losses. Whilst that is ok, it is also a very narrow window on the world of money and economics. Whilst I might feel that using fundamental analysis is not useful in trading for profits in the shorter term, that does not mean that fundamentals are not interesting!

I take a great interest in following various economies and global activities in general are extremely exciting in many ways. As well as following economies I also collect (rather slowly) paper bank notes which is another fascinating window upon various countries’ developments through history - as looking at many African banknotes will demonstrate!

I think a major issue here that your post raises is the question of [I]why [/I]we trade. If one is aiming at earning a living from one’s trading results then I suspect you would not recommend to them to follow your example (so far)! But if one is interested in following fundamentals and taking a personal view on them, and also wants to put a money position on it, then I think your approach must be very rewarding and extremely educational - which is your substitute reward instead of just gaining profit.

You do not rely on your trading for your living and you are not gambling your life savings, so the cost of your interest is only in the same league as, say, a golfer who invests in his equipment or a traveller who pays to go and see other places. It is not a loss, it is what people invest in their own hobbies, interests and pastimes. In your case, it is a keen interest in economics and currency movements - and if you make a profit then so much the better, but profit alone does not necessarily need to be either the objective or the criterion for your positions!

Having said that…-6000 pips! huh!!!

Excellent post, Manxx, and I indeed only started taking trading to this level while I decided that

I should make it work for me as a long-term investment vehicle, rather than as a day-trading tool…

I aim to be more like a stock investor than a day trader, basically, and one who works through

drawdowns as a function of market cycles, with no fear of that…

Indeed, as you put it in your first reply to this thread of mine

http://forums.babypips.com/forextown/79992-am-i-really-trader.html

there are no credentials to define oneself a ‘trader’, and whether you and I call ourselves

something it is not to say that we are a) it, b) good at it) or c) legit.

I am certainly not ‘a trader’: as Eddie said, it is lower down my list of priorities, but I still

follow it with plenty of interest, and I would be happy to do this for a living, if I knew how.

I know I have missed the boat with it in career terms, so I am trying to make it work as

a side-line to my business (music and languages), so that I perfect it and make it grow

my account over time, but without it requiring me to spend hours at the charts…

I would not recommend my trading ‘method’, or rather approach, to anyone wanting to

make a living out of trading.

PS: yes, -6000 pips… ooof indeed!

[PipMeHappy]

Yes, now I remembered your post where you were showing us your Finnish banknotes…

How did your interest in finance and trading start?

[PipMeHappy]

Ah, yes, banknotes…I remember you showing Turbo your Finnish banknotes here…

How did your interest in banknotes start?

Indeed, how did you first get involved in trading?