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Fundamental Analysis Fallacy

  • #1
  • First Post: Edited Jun 19, 2013 12:47am Jun 18, 2013 11:51pm | Edited Jun 19, 2013 12:47am
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:

  1. 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.
  2. 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?
  3. 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.
  4. 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.
  5. 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?
  6. 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.
  7. 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.
  8. 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.

  • #2
  • Jun 19, 2013 12:16am Jun 19, 2013 12:16am
Quoting Ishtana
Besides, being an economist myself, there is no real science or guidelines in making a forecast, anyone can make a forecast.
You are an economist? Really?
  • #3
  • Jun 19, 2013 12:31am Jun 19, 2013 12:31am
Quoting Myo
{quote} You are an economist? Really?
Yup, from memory, I did Economics 100, Economics (Macro) 101, Economics (Micro) 201, Economics (Growth & Fluctuations) 202, & Economics Theory 300, the rest are Finance units.

I could go on and bore everyone with textbook answers how econometrics is used as a model to make a forecast.
  • #4
  • Jun 19, 2013 12:54am Jun 19, 2013 12:54am
Quoting Ishtana
{quote} Yup, did Economics 100, Economics (Macro) 101, Economics (Micro) 201, Economics (Growth & Fluctuations) 202, & Economics Theory 300, the rest are Finance units. I could go on and bore everyone with textbook answers how econometrics is used as a model to make a forecast.
yeah, ok, so what I´d say in response to your thread is that news trading is pointless for retailers imo. It´s true: a news item may be marked as only "medium impact" and yet may have a bigger effect on price than a "high impact" item. And I´d say this depends to a great deal on how players are positioned in the market ahead of the release. And we retailers have no way of obtaining this information and we really shouldn´t care - this is not our game to play. Imagine yourself sitting at a trading desk at a BB: you´d definitely hear rumors circulating about certain upcoming economic events (knowing therefore that a) they´ll be watched closely by people that matter and b) what outcome is really expected by the market) and also have some insider knowledge about where the large orders are. This should make trading a news release more "predictable". Here´s a post by a pro trader which deals with some of this stuff (scroll a little down to around 22:50): http://www.trade2win.com/boards/gene...l-trading.html

that´s how I think it works in general. have never worked at a bb though.
  • #5
  • Edited 1:37am Jun 19, 2013 1:03am | Edited 1:37am
Quoting Myo
{quote} yeah, ok, so what I´d say in response to your thread is that news trading is pointless for retailers imo. It´s true: a news item may be marked as only "medium impact" and yet may have a bigger effect on price than a "high impact" item. And I´d say this depends to a great deal on how players are positioned in the market ahead of the release. And we retailers have no way of obtaining this information and we really shouldn´t care - this is not our game to play. Imagine yourself sitting at a trading desk at a BB: you´d definitely hear rumors...
I agree, news release is a practice of forex insider trading at its best. Which is legit btw, coz no one cares, no one regulates the global market.

Although it is a practice of insider trading, it is not because you know the figures ahead, but you know the orders ahead. And big banks will front run their clients' orders so they can get the maximum profit.

I think it's more than "predictable", if you have access to where the orders are and your own power to move the price, then everyone else is predicting what you'll do.

Wish I could be on the other side for once. LOL.
  • #6
  • Jun 19, 2013 2:19am Jun 19, 2013 2:19am
I am a swing trader - most of my trades are held for 3 - 10 days, and I take direction solely off fundamental and intermarket analysis. I don't consider myself a "news trader"- news events have various effects on my overall sentiment and direction but I don't trade them short term. I don't know if what you are saying about long term and short term trading is true, you didn't really mention swing trading which is kind of in the middle. If you think my approach isn't profitable long term I disagree. Strongly. And it isn't even a matter of opinion.
si hoc legere scis nimium eruditionis habes
  • #7
  • Jun 19, 2013 9:12am Jun 19, 2013 9:12am
since I trade based on the direction of longterm trends,I believe fundamentals are behind the trends.I dont need to know the specifics.This school of thought was brought about by Livermores second book after he had blown....he said its not necessary to ask why it can screw you,dont cloud your mind with non-essentials.

Evidently there are a few savants who can trade off fundies.Hedge funds mostly trade on insider info,how can the retailers compete?

Another thing that mesmerizes me is that the retail mom and pop are almost always net short in an uptrend and vice versa,you can confirm this on myfxbook,oanda and FF members positions.Its just crazy.
wo-yoy! wo-yoy! wo-yoy! wo-yoi! wo-yoy-yoy-yoy!
  • #8
  • Edited Jun 20, 2013 1:57am Jun 19, 2013 10:12am | Edited Jun 20, 2013 1:57am
Quoting numbnuts
I am a swing trader - most of my trades are held for 3 - 10 days, and I take direction solely off fundamental and intermarket analysis. I don't consider myself a "news trader"- news events have various effects on my overall sentiment and direction but I don't trade them short term. I don't know if what you are saying about long term and short term trading is true, you didn't really mention swing trading which is kind of in the middle. If you think my approach isn't profitable long term I disagree. Strongly. And it isn't even a matter of opinion....
My understanding of fundamental analysis is an analysis that attempts to determine the real value of a currency from the economical, political, and futuristic point of view, just like a company's worth is analyzed based on the book value, the office politics, the news, and the future earning projection. The analysis ignores historical price movement. Fundamental analysts focus their attention to fundamental economic factors, economic growth, political unrest/stability, news, and future sentiment of the country. Profit is made when the analyst's evaluation of oversold/overbought currency is correct.

But the biggest trouble with value in anything in life is that it rarely, if ever, matches its price. There are so many intangible things that are part of the value, but cannot be quantifiable. How do you value your family member? Your friendship? Your partner? If you're dying from hunger and the only thing you can buy with $5 with your pocket is a big mac, then would you really value this life-saving burger as $5, hence valuing yourself as $5? This reminds me of a story of a millionaire who bought a glass of water for more than a million when he got stranded in a desert, dying of a thirst, while meeting with a very sneaky man =) I think it's on the Guinness record.

So in forex, real value of a currency is impossible to be determined simply because it is a speculative market, where price can barely hang on for a second, and hence the fallacy of fundamental analysis. Worse, paper money always goes down in value. The price of a currency may increase or decrease, but inflation will always eats the value of money alive. This is why saving money under your bed is a bad idea.

Your success in swing trading is indeed in the middle of the two extremes. But if you take away, or have no access to your intermarket analysis, would you still be able to maintain your winning rate? Would you even enter a trade?

I'm not willing to put my money on EU long, and I don't even know when to put my money in if I decide to so, simply because 3 consecutive red news coming out from the US are all red.

So the ultimate question is really this:

If you a fundamental analyst, how do you determine your entry and exit? At what point and how do you determine whether a currency is overbought/oversold? Don't you think it is only a matter of opinion, just like when technical analysis produces similar statement?

And how do you set your stop loss? At what point can you tell that your analysis is right/wrong?
  • #9
  • Jun 19, 2013 11:43pm Jun 19, 2013 11:43pm
Is there a fundamental analyst here who can explain what happened to price at the FOMC and Federal rate news release on EU yesterday?
  • #10
  • Jun 20, 2013 12:16am Jun 20, 2013 12:16am
Quoting Ishtana
{quote} My understanding of fundamental analysis is an analysis that attempts to determine the real value of a currency from the economical, political, and futuristic point of view, just like a company's worth is analyzed based on the book value, the office politics, the news, and the future earning projection. The analysis ignores historical price movement. Fundamental analysts focus their attention to fundamental economic factors, economic growth, political unrest/stability, news, and future sentiment of the country. Profit is made when the analyst's...
My understanding of fundamental analysis is an analysis that attempts to determine the real value of a currency from the economical, political, and futuristic point of view, just like a company's worth is analyzed based on the book value, the office politics, the news, and the future earning projection. The analysis ignores historical price movement. Fundamental analysts focus their attention to fundamental economic factors, economic growth, political unrest/stability, news, and future sentiment of the country. Profit is made when the analyst's evaluation of oversold/overbought currency is correct.
agreed,,,, !
( I do it when I want to buy stocks )

in the forex trading ?
I doubt it
if there is something you should keep secret,simply just save it,, so, just
  • #11
  • Jun 20, 2013 12:18am Jun 20, 2013 12:18am
I could make you a believer with one exercise.

To simplify the entire process and focus on the mac daddy D of news events, the NFP

Go back to 2010 in a tester and set your charts to daily or weekly
Now pull up the NFP graph on the fantastic calender we have here at FF..

Every time this news release is in an UP trend, consider the world is convinced of GROWTH, which = Risk preferences = Currencies with the highest rate of interest = AUD, NZD

Every time the NFP graph is in a down trend, consider the world is not convinced of GROWTH, which = an unwinding of those risk positions = Bullish for low interest rate currencies = CAD, USD, JPY

Maybe to keep it simple just watch the AUD/USD... Hopefully you notice the momentum stays very much in line with the fundamentals but the most important thing to notice is that it is not an individual figure that will cause a bias, but the trend of a figure,. Even as traders we know pull backs against our positions are just normal. Lastly please notice that it is not a one way street, even when we switch from bull to bear there is sometimes a delay in response, it doesn't always happen a minutes or a few hours after the release, sometimes it can take days. Likely as the market seeks LIQUIDITY to establish it's new positioning.

So add to the mix all the other releases and you have yourself a headache, but at the bare bones of it I hope this exercise will restore your faith in common sense. Some of what you say has some merit, of course it does not work as it "should" but if it did we would all be poor and successful
Time hides Nothing
  • #12
  • Edited 12:32am Jun 20, 2013 12:20am | Edited 12:32am
Quoting Ishtana
Is there a fundamental analyst here who can explain what happened to price at the FOMC ?
Basically Ben Bernanke hinted at tapering back their asset purchases sometime later this year which meant bullish USD. So USD appreciated against everything.

When the fed stimulate the economy by making money more plentiful by BUYING bonds they at the same time devalue their currency, as there is now more supply of money being released into the economy. When they taper back this operation by selling those bonds, it will have the opposite effect. This is what the market yesterday was betting on.

Notice too, that they haven't actually done it yet.. The market is just anticipating them doing it and trying to get in early. SO what will happen later in the year if he comes out and says "actually nah we're gonna keep buying for another year?".. That would be a nice news trade!
Time hides Nothing
  • #13
  • Jun 20, 2013 2:08am Jun 20, 2013 2:08am
Quoting Ishtana
{quote} My understanding of fundamental analysis is an analysis that attempts to determine the real value of a currency from the economical, political, and futuristic point of view, just like a company's worth is analyzed based on the book value, the office politics, the news, and the future earning projection. The analysis ignores historical price movement. Fundamental analysts focus their attention to fundamental economic factors, economic growth, political unrest/stability, news, and future sentiment of the country. Profit is made when the analyst's...

There is a difference between real value and relative value. If you were to value a manufactured item you would begin at zero, and then add all the components of price such as parts, labor to produce and distribution costs. The total of those components is the real value. Currencies however are measured in relative value. The process doesn't begin at zero - it begins wherever price is now, and every factor you add to the equation either pushes its value up or down.

You also need to remember that news and data doesn't move price - it is people's reaction to that news and data that moves price. The people who move the market tend to move in herds, and can be predicted.

Would I still be able to trade without my fundamental/intermarket analysis? No, I wouldn't even try. The relative value of each currency, at least in the medium and long term is clearly driven to varying degrees by interest rates, bond spreads and yield curves, commodity prices, risk sentiment, monetary policy, stock market conditions, economic growth and trader positioning. It isn't easy to read but if you engross yourself in this stuff for a few months, learn who moves where, when, how and why, and watch money flowing back and forth it becomes quite mesmerising. Like sitting on a quiet beach watching waves roll in, it starts to become very predictable. The thought of trying to trade without considering the cause, rather than the effects of price movements, now seems absurd to me.

BTW, I never said I am profitable or successful. In post 1 you asked for proof that traders can "walk the talk"- I am not going to publicize any financial details, so I have never made any claims about myself. There are however traders outside FF with publicly verifiable records who trade the same way I do.
si hoc legere scis nimium eruditionis habes
  • #14
  • Jun 25, 2013 4:19am Jun 25, 2013 4:19am
I look at fundamentals for long term trends, I don't try to trade intra-day using data releases or news I don't the the stops on intra-day set ups can cover the potential whip from a significant data release.

As a predominantly technical trader I use the FF calendar as a warning for times I can be whipped out of a small interval trade.

Following the news can help to understand why FOMC statements turn the market or you can just look at the daily trend and take that as being the market judgement. I don't think it makes much difference at that level, the end result should leave you trading in the same direction as the trend.

Rather than demanding proof from fundamentalists I would like to get some pointers as to where they get their information from and judge it for myself.
  • #15
  • Jun 25, 2013 4:42am Jun 25, 2013 4:42am
As I know value Investing is buying a stock on a Intrinsic value and making profit,But I really doubt how do you find Intrinsic value of a currency To be honest fundamental is really important in all the markets whether it's forex or stock but it works in a different way IN STOCK IT'S VALUE INVESTING IN FOREX IT'S GLOBAL MACRO and I don't think value investing will work in forex because of the market's liquidity
  • #16
  • Edited 1:04am Aug 6, 2013 12:44am | Edited 1:04am
Ha! Another classic of fundamental fallacy happened today. AUD/USD. RBA Interest rate. Previously 2.75%. Predicted 2.50%. Actual 2.50%. Yet, as I'm writing this, AUD/USD is rocketing up!

Fundamentally speaking, Australian economy is going down, inflation is up, unemployment is rising. To prevent further damage, the interest rate is cut. In theory, all these should weaken the Ozzie as their relative value is going comparatively down, making Ozzie a lesser attractive country to invest in globally. Yet 70 pips went the other way around, enough for majority of traders to get their stop loss hit (including those who paid a lot to get the news early), and for the big boys to order a round of champagne in the dealing room.

Fundamental analysis is useful for economists and business people, but not for us, short-term retail forex traders. They only want you to believe that it has some kind of value. I trade without knowing the fundamental values whatsoever, I only pay attention when the news are released, and yet, I'm on the green side.
  • #17
  • Aug 6, 2013 2:03am Aug 6, 2013 2:03am
Quoting Ishtana
Ha! Another classic of fundamental fallacy happened today. AUD/USD. RBA Interest rate. Previously 2.75%. Predicted 2.50%. Actual 2.50%. Yet, as I'm writing this, AUD/USD is rocketing up! Fundamentally speaking, Australian economy is going down, inflation is up, unemployment is rising. To prevent further damage, the interest rate is cut. In theory, all these should weaken the Ozzie as their relative value is going comparatively down, making Ozzie a lesser attractive country to invest in globally. Yet 70 pips went the other way around, enough for...
There was never any doubt that this was going to happen, so it was priced in. AUD rose 70 pips on the rate cut? lol, no mention of the 400 pips it dropped steadily over the last week. You can be as right as you want, I can be as wrong as you want, but my account balance is larger now than it was last week purely because of my expectation of this event and reading of the background conditions it occurred in.
si hoc legere scis nimium eruditionis habes
  • #18
  • Aug 6, 2013 2:17am Aug 6, 2013 2:17am
Quoting numbnuts
{quote} There was never any doubt that this was going to happen, so it was priced in. AUD rose 70 pips on the rate cut? lol, no mention of the 400 pips it dropped steadily over the last week. You can be as right as you want, I can be as wrong as you want, but my account balance is larger now than it was last week purely because of my expectation of this event and reading of the background conditions it occurred in.
400 pips hey? That has happened in the past? Sounds like you're infusing technical analysis here, you do care about the past price. It's off the topic.

I'm talking about those fundamental news traders who think that an interest cut must be accompanied by drop in price.
  • #19
  • Aug 6, 2013 10:42am Aug 6, 2013 10:42am
This is not " fundamental fallacy ".

Fundamental trading has its target. When you short aussie in terms of RBA next expectation of rate cut in next month or next week, then, you enter short on aussie, and expect price to go down, down, down, till the time of meeting.
When you got exact result from RBA, then, you got your fundamental target, so, close shorts. You win.

Then, you go to discover next possible fundamental expectation as another fundy trading target.

In technical trading, you use price level as a target level or use fade momentum as target exit. In fundy, use the result of event or the time of event as a target for exit.
  • #20
  • Aug 6, 2013 2:57pm Aug 6, 2013 2:57pm
Quoting Ishtana
{quote} 400 pips hey? That has happened in the past? Sounds like you're infusing technical analysis here, you do care about the past price. It's off the topic. I'm talking about those fundamental news traders who think that an interest cut must be accompanied by drop in price.
I'm not aware of any genuine fundamental analysts who think that way.

To point out the obvious, that move wasn't "past price" when I, and other fundies, got in

There is a huge difference between fundamental analysis and news trading. You start a thread titled 'fundamental analysis fallacy', you insist on discussing news traders, then you accuse me of going off topic for trying to explain fundamental analysis.

It is widely known in the muppet community that news events tend to be priced in before the event happens. Yet nobody seems to dig deeper and ask the obvious questions - how is it priced in? Why did price move to that level beforehand? And can I exploit that move instead of bemoaning it after the fact?
si hoc legere scis nimium eruditionis habes
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