Fundamental Analysis : That Will Motivate You Trading Style !

Fundamental analysis, or a fundamental view of currency markets, is widely misunderstood. It is not simply about the economic conditions facing a country. Fundamental analysis, when properly understood, contains sentiment analysis. Let us state this another way. 

Fundamental analysis deals with economic forecasts and expectations about economic metrics such as CPI (consumer price index), GDP (gross domestic product), employment, and so on. These fundamental expectations involve longer- and medium-term durations. The exact mix of expectation durations is, in fact, always changing. Sometimes expectations of economic outcomes a year ahead may impact current price action. At other times, the immediate geopolitical and global economic conditions have an immediate impact.

In a way, this view of a fundamental structure behind currency movements is similar to recent discoveries in physics of the Higgs boson field. In that major discovery, it has been proven that electrons get their mass as they go through the Higgs boson field. In currency trading we can say that prices get their direction and strength of direction as they go through a field filled with fundamental expectation forces. 

Sentiment is the bridge and transmission channel, between long-term and short-term economic expectations that directly act upon the price. Within the rubric of fundamental analysis, sentiment analysis focuses on current expectations about whether prior fundamental forecasts are correct. In other words, sentiment is the measure of the immediate change in expectations, caused by data releases, geopolitical crises, or any other information shock that reaches the markets. Sentiment is about both long-term and short-term expectations. 

Sentiment is how the market expresses emotions. Emotions are always about something and in currency markets emotions are generally about risk and uncertainty. Traders, therefore, need to diagnose what the market movements are about. This contrasts greatly with the current, dominant technical view of markets and currency pairs.

What is a Currency Pair Price? A Fundamental View

An exclusive technical analysis view of markets, and in particular currency pairs, is highly flawed. The weaknesses and limits of technical analysis starts with a misunderstanding of what currency prices are all about. The currency pair is, from a technical analysis view of market reality, a point on the X–Y price axis. Charts visualize the price behavior. For example, if the EURUSD has moved 20 pips, from 1.1700 to 1.1720, a line chart will show how this movement has occurred. Candlestick charts show open, high, low, and close prices per unit of time (minute, hour, or other time slices). The X axis represents time. Simple enough. But is that what a price really is? 

The fact is that it is more than a measure on a X–Y axis. The fundamental viewpoint asserts that a currency price and its accompanying charts, are codes that are really enciphered signatures of expectations. A better understanding of how to unlock the codes within each currency pair will enable traders to profitably ride the expectation waves that move currency prices.

Flaws in Technical Analysis

The question arises: If technical analysis has these flaws , why is it so dominant? The answer is rather simple. The dominance of technical analysis as a tool for traders is not because technical analysis is totally effective, but because it is easy to sell systems and courses offering hyperbolic performance promises. 

It is natural that traders want to find the holy grail for predicting direction. As a result, responding to the desires and hopes of traders, there is extensive marketing of signals and systems, and courses that teach set-ups to respond to this demand. Some systems and signals are profitable. None are profitable all of the time. The products of the trading industry are designed to be produced with minimal viability, because speed to the market is a more important priority than performance effectiveness. As a result, a total reliance on technical set-ups presents many flaws. Let us explore further some of the deep flaws in using technical analysis.

The first deep flaw in exclusive reliance on technical analysis is psychological and philosophical. The very premise that one can predict that a price will reach a target is fraught with problems. The price target is in reality not technical in nature. It is a fabricated human construction. It is as subjective as searching for and finding a face in the clouds. If you look for one you will find it, but it is delusional to believe that the face in the clouds really exists. Similarly, a profit target is a point of hope in the price arena. But in trading, “hopium” is not a useful drug.

The very act of thinking that there is a target inherent in the currency pair price or pattern is also teleological (defined as inferring something has an intention). Inferring intention is a common attribute of human behavior because it is more comforting to deal with an assumed intention then to deal with uncertainty. Consider the following statements: “The price wants to go to the next Fibonacci level”. “The price will bounce off resistance and then move to support”. “The price will break the outer trend line and then move to the inner trend line.” These types of comments are heard every day by traders and reflect the flaw that is inherent in teleological thinking in trading.