Fundamentals - The Ultimate Lagging Indicator

Another late afternoon brain snap has me posting another random thought for you all to ponder. We hear constantly about how all indicators are lagging indicators, as they take historical prices, throw a mathematical formula over it or compare it to another historical price and then show us a relationship. They are lagging cause they are based on the past.

Can't deny that this is true, and is the reason many advocate the use of price action as it is how things are now (actually it is how things were 1 second ago, so technically it is also lagging ), not how they were before. Really, there is no such thing as an accurate leading indicator, if there was, well we'd all be sipping umbrella laden cocktails in the bahamas, not in front of a computer looking at squiggly lines.

Anyhow, lets find a point to all this, if technical analysis is shot down by the fundamental traders as nonsense, as it is the interpretation of dated data from lagging indicators, I put to you that fundamental analysis is worse! Most fundamental analysts would clasify themselves as longer term traders, holding positions for days, months if not years based on economic conditions. The thing is, and this is what is bugging me, fundamental data that these decisions are based on, for me, is the ultimate in lagging indicators.

For example, a quartlerly report on unemployement for example, do you think this data is real time?, no, we may receive it within seconds of its release, but the data is based on statistics collated over the last 3 months. Add to that the time it takes to collate it, adjust it, compile it into a shiny binded report for the media, and then announce it, and we have trading decisions based on data that could be up to 4 months old. Is that an accurate indicator of current economic conditions? well no, it is an indicator of economic conditions between 1 and 4 months ago, sounds like a lagging indicator to me.

So those fundamentalists can shoot down the technical traders all they like, but they're decisions are based on nothing more than historical data, just like those they choose to beguile.

Ah ... that's better ... all vented now ...

Happy Trading!

I'm currently working on an IT project for a government statistics agency... and what Akuma99 says is correct about the time it takes to compile the figures.
There's stories on the net of Soros et al having eyes in statistics offices and treasury depts, to help them make their fundamental decisions - one story about Soros was a mole was in the British treasury prior to him and his pals selling the pound - as an example, the quarterly QGDP figures for June began calculations in April, but the basic figures are ready 2-4 weeks before the quarterly publishing date.
What has really opened my eyes and unfortunately made the statement "88% of all statistics are all b*llocks" entirely true, is the fact that what we call making something up, statisticians call 'adjustments', basically the worker bees crunch the numbers after your survey has been filled in (bet you love your country's stats organisation if you own a business or are an accountant! ), the results then go up the line where various beard strokers (usually in sandals) 'adjust' until they feel they 'look' ok, these are usually within a minimum or maximum tolerance percentage to the previous report.
Unfortunately I can't really say any more than that, but let your imagination run wild for some scenarios and you wouldn't be too far from the truth...

You're right, Akuma...they are lagging indicators....this point is clearly stated on CNBC almost weekly.

HOWEVER, they are a large part of why the market moves.

Can you imagine the market if it were controlled strictly by technicals?

It would be so boring and flat it may range in a tight range in a sloping action for years as political changes take time to develop.

On the other hand, if it were strictly controlled by fundamentals, the market would be so choppy and chaotic that it may be pratically untradable for small speculators!

These are extremes, obviously, but if you think about it, the market is a balance of technicals and fundamentals with one struggling to gain over the other which gives us our wonderful volatility!

Does it matter that indicators and or price action are lagging ?

What do we look for in Candles (Price Action) ? We are looking to see what happened to price at a previous price. The more times a support or resistance level holds the stronger it gets. If Cable bounces of 1.8600 5 times, there is a good probability it might again. The information I have about 1.8600 (just an example) is old or lagging, though why does that matter ?

Also in the time frame that we operate, we are looking at what happened in the current period to the previous ones (lower highs, higher lows, inside candles, outside candles). It is all based on what happened before.

The majority of the market participants are aware of the same technical data, so if I see that 1.8600 is a massive support level, I am sure that everyone else will also note that, hense a good chance of offers at that level.

The higher the time frame you trade on, I would imagine the more significance of fundamental data.

Since I am intraday trading, taking my entries from a 1 or 5 min chart, the bigger fundamental picture does not seem to matter. I usually exit positions a few minutes prior to main fundamental data release and notice that the main moves happen after these releases, when the numbers are out of sync with the expectation.

Everyone and his dog are suggesting that Cable must go short on a retrace after 6/7 + days of dollar losing against the pound. Though if my techincals say go long (intraday) I am going to !

Ah now I never said it mattered that indicators are lagging, by jove I use them in my trading system, it was more about the fundamentals vs technicals argument. I have a saying writting on my desk:

"Technicals give me the direction, fundamentals the momentum"

It is there to remind me not to base my decisions on news releases, while recognising that the fundamentals are what essentially make me money. I trade of 1H charts, and recognise the major runs are fueled by the fundamentals. There is no fx market with no economy to give reason for currency trades around the world.

I just thought it might be something worth thinking about

If there has been a big move after a fundamental anouncement, if I get an entry, in the direction of that move, I often abandon my usual target strategy (20 / 60 pips), get the stop to B/E and leave it for a bigger than usual score.

Now, that is a sound strategy.

That's funny...While I'm not necessarily a fundamental driven trader, I use fundamentals to get a "feeling" for what the market "wants" to do. The underlying fundamentals (including market sentiment) will provide the DIRECTION, while the technicals will provide opportunities to open positions in that general direction.

I think there's a difference with trading on fundamentals versus trading on news, in my opinion. Trading on one NFP compiled from 3-months of data isn't exactly what I would call a good fundamental indicator. Trading fundamentals is more a compilation of many ideas that would give you a general sense about the current market. You're right, though...most fundamentalists don't actually trade often, and often their trades "lag" so to speak. That's because they don't try to pick tops and bottoms of longterm trends. They simply look for the absolute lowest risk entry point and the highest profitability over the long-term.

A lot of people, including myself don't really get this because there are so many profitable shorter-term trends to take advantage of, but some people will do what some people will do.

I'll tell you what, though...if I could ever find a long-term (6-month to a year) profitable carry trade on something like the CAD/JPY or the NZD/JPY, I would jump on it in a heartbeat...can you imagine how much INTEREST you could gather just holding a trade for a year? All that on top of a rising exchange rate in these pairs and you could be extremely happy in a year with a few hundred standard lot investment.

However, it should be noted that finding that type of long term trade is next to impossible WITHOUT fundamentals. Right?

Akuma,

I just want to say that I quite agree with you. Fundamental analysis can help you to get the big picture but they are not very useful for intraday trading. I prefer not to rely on them when I'm dealing with the highly leveraged and sometimes highly volatile Forex market.

everyone is different of course, but I found in my experience, picking the market reaction to fundamental announcements on an intraday is no better than a 50/50 pick at times. It could just be a weakness in analysis on my part (most likely), as I have no real passion for the fundamentals at all, but since I ignored the news, I have picked up some nice profits letting my set-up tell me what to do.

Yesterdays FOMC announcement was no different.

This was a lesson that took time and evidence for me to learn. I always looked at the news release and saw how they would be for example strong for the dollar, you get a quick bullish USD increase but the general trend took over eventually. A couple of times I have seen positive US news not even help the USD at all, even for a quick period of time. I have gone to mostly technical but still keep an eye on fundamentals at least to see what can help out volatility for the next week.

The thing with news releases is you don't know just how much the market has priced in the change already in the week/s preceding the announcement. If it is to be expected that an announcement will be dollar positive, chances are it has already been priced into the market before the announcement hits. If the announcement comes out as expected, then the reaction may be limited. The real fun comes when the market prices one thing in, and the result is the other.

News trading would result in trades with almost 100 % accuracy. Most people dont understand that it is the news that actually moves the market in forex. I know of traders that have not lost a trade in 2 years, they shun technical analysis and claim that it doesnt work. I believe you need to do both, understand which news is coming out and its impact on the markets. technical analysis can then be used to confirm the move. trading technical analysis alone is trading blind.

please give some thoughts on this.

traderandreas

It's important to follow & track the fundamentals. I believe the fundamentals is what tells you the financial story of the currency. Just like income statement, balance sheet, and cashflow statement for a publicly traded company, you need to know what the currency is worth.

I agree with both merits of your respective sentiments, akuma and traderandreas. My feel is that extraordinary gains come from using technicals in anticipation of economic data release. Also, this is the time when risk to reward is very low. Also remember discipline and money management.

Fundamentals reflect technicals reflect fundamentals. I think it's good to pay attention to both. Besides, economics is such an interesting subject! I'm no expert, just my opinion, but I have these hunches that tell me fundamentals is important. For example if it weren't so important, Merlin would not dedicate so much time and energy to keeping the calendar up to date. Have any of you seen how far back the calendar goes?? I haven't come up with anything yet, but I'm working on it...I believe there is a story behind the data. I would just love to find a discussion board with people who talk and analyse fundamentals. If you know of a place please PM me or post reply to let me know.

Happy trading everyone!

But how can a report be a lagging indicator if no one knows the
results until after an announcement is made? Some of the explanation
for movement before an announcement is due to anticipation
of what the announcement will be due to a consensus forecast,
and therefore, some would say the announcement is "priced in",
but there are always "surprises" that can cause a change in trend.

This is so true. The concensus estimates are compiled long before the releases and I would go so far as to say that surprises probably have only a temporary impact on trends...I mean, wouldn't that be the case for the USD?? After a while, you'd expect good news for the economy would actually bolster the dollar, but everyone seems to be shrugging that off because there aren't as many upside surprises (although we definitely have had them).

I almost expect the dollar to keep falling until someone says the bulls are back...LOL. As it is, if you had listened to all the news reports from about 6 weeks ago, you'd be up 1400 pips in the GBP, 1000 pips in the CHF, 800 pips in the Euro, 1000 pips in the Yen...and that's just jumping on board when they said the tides turned from bulls to bears (I usually get this general analysis from dailyfx.com). Hell, they were a few days late reporting that and you could have made out like banshies. (Makes me wish I actually held trades for longer than a day...hehe).

Personaly I find that their both a heap of crap.Not to say you can't profit from them though...

One thought: sometimes the DIVERGENCE between momentum (Funnymentals) and price action (pure technical) can provide a LEADING indication of market activity.

IMHO

and continue to move.

My view on using fundies to trade is to know the reports and listen to the speaches then from that know what the economy is expected to be like in the next (n) months

It all boils down to interest rate policy and money flocks the higher interest rates.

wow, darkstar is back