With another interesting month of trading activity behind us, toasts to success and open wounds of defeat are just some of the scenarios faced by the growing population of speculators across the world. It's been a turbulent time for all, no matter what your toolkit contains, and anyone who says otherwise is a braver man than me! Uncertainty and indecision are the flavors of the times and never has there been a greater need to filter through the noise and keep things as simple as possible.
Whether you are schooled in the approach of either Technical or Fundamental Analysis, or possibly both, there have still been challenges within the current market environment, with a series of volatile big swings and from time-to-time, periods of choppy consolidation. Conditions like these are always a challenge for even the most seasoned trader, and sometimes it can be a good idea to just sit on the sidelines as an observer and wait for things to calm down. However, after teaching a variety of students over the years, I know full well that it can be hard for even the most seasoned of traders to do nothing, let alone the impulsive novice. It can be tempting for an independent speculator to dip their toes in the waters of the market in an effort to capture a slice of the parabolic profits the market has to offer. If you find yourself in this group, then please let me offer some key points of advice.
Firstly, be patient and wait for only the most objective low risk and high probability opportunities to present themselves to you. Jumping into a fast moving market can always be an impulsive and reckless endeavor if not planned methodically in advance. Secondly, keep the stops as tight as possible and be prepared to lock in or take a decent profit when the market puts it on the table. Strong moves can lead to greed for more, but remember that the quicker prices move in one direction can often lead to just as violent a reversal in the blink of an eye. The third piece of advice would be to remove all bias from your analysis. This is by far easier for the technical trader as opposed to the fundamental trader and is one of the many reasons why I personally look to the charts for my clues. Let me explain.
If we take the following chart of the AUDUSD currency as our example, we can see just how dangerous and misleading the market can be if one chooses to follow news instead of price:
On the Sunday Forex market open on June 21st, we saw a strong gap up in price on the AUDUSD currency pair. For two weeks prior to this move, the Aussie had been enjoying a healthy upside recovery since putting in yearly lows around the 0.8100 area. That very weekend prior to the open, news was released that China was intending to loosen the Yuan's peg valuation against the US Dollar.
From a fundamental perspective, this was interpreted as a boost for the Australian Dollar for two reasons; one, that China's intended action would allow it to eventually strengthen against the Greenback, hence allowing the Aussie buck to appreciate against the US Dollar; second, that the news suggested that China would be likely to enjoy further economic growth, thus creating a demand for Australian Commodities, and so a demand for Australian Dollars as a result. Considering that the AUDUSD had also been rising prior to the news and with the "trend being our friend," many fundamental traders took this as a good enough reason to invest more hard-earned cash into the Aussie Dollar. However, as many of us already know, things are rarely this plain-cut in the world of Forex.
You see, no matter how well anyone attempts to read between the lines of the fundamentals, the result is always going to be the very same: Analysis of this type is always based on opinion rather than price. Even if the market decides to share the analyst's opinion, they are still left without an entry and an exit price. With this predicament in mind, it becomes highly challenging for any fundamental trader to secure a level of consistency. In fact, one of the key dilemmas is the fact that the fundamentalist is continually faced with a barrage of news releases which can hamper and contradict positions taken previously. Like in the below example:
Following on from the previous example of AUDUSD, shortly after the gap up and positive news from China, we saw a complete reversal in price from the highs of 0.8850 down to as low as 0.8315 at the time of writing this article. And the reason from a fundamental point of view? News was released later that week which implied that China's economic health was not quite as stable as first thought, and leaked reports were emerging about Chinese workers striking in retaliation to low pay, resulting in a continued downwards trend in the currency pair.
So how does the fundamental trader cope? Well, simply put, they need to respect price and combine this with other types of analysis. Entry prices, exit points and a disciplined trade plan are all vital essentials in the speculative process, along with the fundamentals, if you choose to use them. As I have said many times before, news creates opinions whereas price is fact. Something to think about.
