I find fundamental short-term trading as one of the most confusing aspects of forex trading. I'm not surprised to find that in the majority of forex teaching, we are told to avoid trading the news. You have a good news, the price goes up OR down OR both, destroying the straddle traders. This is evident from the last NFP (May 2013). You have a bad news, the price goes up OR down OR both.
No doubt there are traders who made big money on fundamental analysis. But my question is whether it is their fundamental analysis that is correct, or whether it is their fundamental speculative analysis that is correct.
The only reason IMHO, why traders trade news, is the gambling mentality that is worse than technical analysis gambling mentality. The promise of easy and quick money is very hard to resist indeed.
But not to be a hypocrite, I myself sometimes trade the news, but only when it supports my setup. Nevertheless, there is something really fishy, a real fallacy in fundamental analysis, especially in the short term. Long term fundamental analysis, when you stack up the result of 100 economic reports over the 6 months period, studying it night and day, then you have a good chance of being right. But it's just too bad, because you're so late of being right. By the time your long term analysis is bullish, new reports with negative sentiments have begin to turn the price around. So either way, long-term fundamental analysis is lagging, and can only explained what has happened, short-term fundamental analysis cannot be used to CONSISTENTLY make an informed trading decision. You don't have to agree with me, but let's cover a few basic aspects of short-term fundamental analysis:
No doubt there are traders who made big money on fundamental analysis. But my question is whether it is their fundamental analysis that is correct, or whether it is their fundamental speculative analysis that is correct.
The only reason IMHO, why traders trade news, is the gambling mentality that is worse than technical analysis gambling mentality. The promise of easy and quick money is very hard to resist indeed.
But not to be a hypocrite, I myself sometimes trade the news, but only when it supports my setup. Nevertheless, there is something really fishy, a real fallacy in fundamental analysis, especially in the short term. Long term fundamental analysis, when you stack up the result of 100 economic reports over the 6 months period, studying it night and day, then you have a good chance of being right. But it's just too bad, because you're so late of being right. By the time your long term analysis is bullish, new reports with negative sentiments have begin to turn the price around. So either way, long-term fundamental analysis is lagging, and can only explained what has happened, short-term fundamental analysis cannot be used to CONSISTENTLY make an informed trading decision. You don't have to agree with me, but let's cover a few basic aspects of short-term fundamental analysis:
- Who gets to decide whether to label the news as low/medium/impact news? Past statistical result maybe. But if this is accurate then how come they don't always act as they are labelled to do. Medium news release can drop the bomb, high impact news release can give a merely 10 pips movement.
- Who gets to decide the figure value of the news? Every good economist and statistician will tell you that numbers can never represent the reality 100%. an X% of unemployment rate doesn't mean there is exactly X% in the country who is looking for a job and couldn't find one. And how do you know that those numbers are not cooked in favor of the creator? Do you know government departments cook their book in order to increase/maintain their allocated budget from the federal government?
- Who gets to decide the "Forecast" value of the news? Economists maybe. And who they work for? The banks and the government, not us retail traders. Conflict of interest? Of course. Besides, being an economist myself, there is no real science or guidelines in making a forecast, anyone can make a forecast. Opinion is the cheapest commodity on earth. And if one fundamental trading theory is valid, then this forecast value is CRUCIAL. People compare the anticipated against the actual figure, and this is why some very good news is still not enough to "satisfy" the forecast value and price went the opposite way. Yet,... this forecast is a merely a toy by those who made it up in the first place.
- Why is it during crucial speeches, even before the speaker says "Hello", the price has already moved 100-200 pips? What's so fundamental about that? Sounds like speculation at its best. Indeed, fundamental analysis should be relabeled as fundamental speculation, just like technical speculation.
- Why is it when most traders are still clicking the green refresh button, STILL waiting for the result to come up on the economic calendar to make an analysis from, price has moved significantly, the millisecond the time it is due to be released. How can you analyze, more importantly, profit from something so lagging as that? Could it be that the figures really do not matter at all?
- I've also heard how some traders go to such an extend, paying a very high price, just to get the result ahead from everyone else. But again my point is, the figures DO NOT matter, at least in the short-term. Say you know the NFP is positive, and you ready yourself to buy EU. Then, just like the previous NFP, price goes down FIRST, hitting your stop loss, before going up SECOND, making you look like an idiot to think you have the advantage, then going down THIRD, again making you look like an idiot to spend so much money to get the news results ahead of everyone else and end up with a big loss.
- Don't you know brokers have an arsenal of tricks for people trading the news? I've been a victim of one myself. When price went the other way I COULD NOT close the trade. It kept giving me error. Only when the margin called was issued they closed my trade, returning me pennies.
- I'll add more to this as the discussion develops.
For now, my own temporary conclusion is this in regards to fundamental analysis:
Short-term fundamental analysis is NOT a reliable, timely, and consistent tool to make an informed trading decision. Fundamental analysis is an excuse to induce people to trade at news release time, providing the market makers with enough volume to move the market in the direction of their favor.
If you're a consistently profitable fundamental analyst (not fundamental speculator) than show us some prove that you can walk the talk.
So, we have technical analysis fallacy, and fundamental analysis fallacy. LOL. Such a life of a trader.