If you’re trading currencies, then I can bet my wooden leg (the left one) that you’re using one, some, or all of the three analytical methods common to Forex. I’m talking of course about technical analysis, fundamental analysis and sentiment analysis.
Lets check a quick definition on each shall we:
Technical Analysis - the framework in which traders study price movement
Fundamental Analysis - looking at the market by analyzing economic, social, and political forces that affect the supply and demand of an asset (in this case currency)
Sentiment Analysis - the thoughts and opinions of all traders expressed through whatever position/s they take.
So which one/s are you?
Well……..you may strictly be a technical trader and place your trades based soley on what you see on the price action charts, or, you might be a staunch fundamental trader (like the oil and gas share trading ex-accountant I live with, go Stevie!!) who follows the myriad of social, political and economic reports that are released everyday from all of the major countries around the world (with a floating currency or not……China anyone?). Or, you may just throw technical and fundamental info to the wind and trade your days away using nothing more than market sentiment as your barometer of risk and your green light for placing trades.
Whatever type of trader you are or are in the process of becoming, there are a couple of points I think one needs to consider along the way.
Allow me to vent….
1. Which of the three do you need?
In my opinion “ALL OF THEM”. (oooh I can hear the trolls roaring!!). Just like a triangle needs 3 points to be complete and a stool needs 3 legs to stand, so too trading forex needs the three foundations on which your trades can be established.
Hear me out on this one - Sentiment is derived from the overall opinions of the market………………who’s opinions are formed from technical and or fundamental info. Then, technical info (as great as it is) is the result of deceisions made using fundamental and market sentiment analysis. (stay with me here) Finally, fundamentals are the result of (or at least heavily influenced by) technical and market sentiment analysis.
Do you see the pattern?
THEY ALL INFLUENCE ONE ANOTHER!
So if you are to use only 1 or 2 of them, in my opinion, its the same as riding a tricycle with only two wheels. You can ride it for a little bit, but sooner or later you’re going to stack it. Now, am I saying you need to be an expert in each field? No…..you can still favor one over the others, but what I am saying is, take them “all” into consideration when looking to place a trade.
2. Paralysis by Analysis
I know you would have heard this term alot, however, it’s for that very reason I bring it up here. Paralysis by analysis in this context applies to all three of the above methods, but moreso to fundamental analysis…better known as fundies. ( I am so cool aren’t I?)
Fundies are made up of sooooooo many different social, economic and political reports and or announcements that are issued daily, and each of which has the ability to directly or indirectly influence your chosen trading pairs (or not).
Interest rate decisions
Trade deficit reports
Non Farm Payroll
10yr Bond rates
Consumer Price Index
Economic Sentiment report
etc, etc, etc,
Then on top of that, you need to work out if the effects of these reports are “likely” to be negatively or positively correlated (directly or indirectly) to the pairs that you are trading, oh and dont forget that alot of these reports are released at the same time so you have to work out what effect another countries information will have on your pair when 2 announcements released at the same time affect each other…………….then you should be able to tell wether you go long or short on your pair…………(WTF?)
Wow I’m tired………..are you confused? I dont blame you!!!
Trying to piece all of that together is practically impossible. (And that’s just one of many possible scenarios). With fundies there is so much information that you can develop analysis paralysis. Fundies are a great info source to be “taken into consideration” using the summary points of only the most important reports. Combine that info with your technical and market sentiment and take an overall view of the three combined.
3. The quality and timeliness of your info
In anyone of these three areas you need the best up to date info you can get your hands on (especially if you scalp trade or event trade). For fundies, having an informative economic calender (with a countdown to each event) to let you know when the major reports are coming out is crucial. So to is up to date info feeds from the various major trading houses and independant info sources. (I know of many companies that pay big money to have infomation feed to them the second it happens so they can get the jump on the market). Having quality market sentiment indicators and economic sentiment reports from the various nations the minute they come to hand is also crucial. Lastly, having a high speed data feed and New York Close trading charts for your technical analysis will see your three way trading foundation complete.
Now for those of you that are still awake………..that is alot to take in I know……………(I am actually asleep now…), but if you’re serious about trading and moreso trading with an edge, being informed and incorporating the above methods and sources will give you an edge far beyond that of the majority of traders that are in direct competition to you. (no point in taking a knife to a gun fight I say…)
So, how is ths working out for me I hear you ask? Well, to be perfectly honest………..it’s like swimming upstream through treacle………..which is exactly what I expected. The good news is that as I go about learning these three methods each day, the technical, the fundamental and the market sentiment, my subconscious is quietly piecing it all together (whether I can feel it or not) and in a few months it will all start to flow. And that my friends is when the real leverage comes in to play, with a trading edge that has three sides to it rather than one.
Anyway, thats enough of my ranting for today as its time for me to do some more question and answer cards to test myself.
To your trades
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