Fundamental Trading with a Directional Bias

Bobart

Yes, it is difficult to make it work in real time with what we forecast to happen with the currency. That's why I'm looking at taking a longer view of each release. The biggest thing for importance which I keep saying on this thread is what the central bank are focused on, and they tell us. If a central bank is focused on employment, then even if a Home Sales figure or Building Permits figure may be way off the previous figure, people with money won't care, because according to the central bank that section of data is actually doing fine.

USD upwards movement is definitely because of what the Fed have been saying on that interest rate hike we're all expecting. And GBP weakness is because of some poor data released on Friday. Also that Euro weakness from the ECB now having a major concern on inflation.

It would be great to see those indexes, or even speak by PM if you'd rather not post on the thread. As for the breakouts, I believe that prices break either way not because they're supposed to, but because of fundamental factors. For example, the NZD/USD trade I have posted above for next week, I believe that the level of support will stay as support initially and we'll have that price move up to the level of resistance, because of fundamental factors playing out at the start of the week. That level of support though may be broke later next week or the week after because of continuous strength in the dollar.

In some cases though, as presented in the first post on this thread, you can trade very short-term (a few hours) and catch pips just from the London open. We know that London has the largest influx of capital into the markets, so looking for a short-term strength or weakness will work. I have, on many occasions, caught a simple 30 pips in one or two hours off the London open. It's more risky, but works the majority of the time. These are the two ways I'm trying to speak to people about.

I'll post a trade from December where just a few pips are caught.

Bobart

This is the other example of a risky trade but one for just a few pips at London open.



If we actually look at the fundamentals for that week, we have some huge events. We have first some Dollar weakness as the CPI figure (huge for inflation and extremely important for raising them interest rates) was forecast to come in under 0.0%, this put a negative look on the dollar for the start of that week anyway. But we also had some weak CPI data coming for the UK. Weak data against a strong economy, GBP/USD sounds perfect. I was cautious and the reason I didn't go looking for loads of pips or a longer term trade was because of this VERY bad US news forecast, which people would be more concerned about than the GBP news, for obvious reasons. I didn't enter long, but only a short position as per the attached at London open. 30 pips in and out.

It really is an effective way to trade this way.

Monday 5 January 2015

Afternoon all, we have had a fantastic setup today based on the negative UK news, Construction PMI data. This was forecast to come in worse than previous and we have seen it come in even worse than forecast.

That's negative UK news, so we're going to look for a strong currency. Two strong currencies are both the New Zealand Dollar and US Dollar. We all know what's happened with the US pairs last week, so this was a potentially rewarding trade. We're looking to London open again.

GBP/NZD



We can see a huge drop on GBP/NZD at London open, from resistance to support levels.



We can also see a nice drop on Cable.

Looking now to the negative EU Inflation news on Wednesday.

Thanks
JP

Hello, apologies for the lack of posts over the last couple of days. I've been busy doing research and analysis as we've had a busy week and I'd like to showcase some trades.

Monday 5 January 2015

On Monday we had some very important UK news due which was the Construction PMI, a growth indicator, and something that we know the central bank are focused on. This was due to be negative and so simply put, we need a strong currency to trade against. We also know that we have had some weakness in the pound because of lower inflation.



So as you can see from the chart, I paired the British Pound with the New Zealand Dollar. And, as you can see, GBPNZD Absolutely plummeted a good 200 pips before there was any buying power at all. A fantastic trade to start the week off.

Tuesday 6 January 2015

On Tuesday we had some more news but this time from the US. We had news again from the UK but we know from listening to the central bank and the analysts that the Services sector isn't a concern, Construction and manufacturing are, which is one reason I ignored the Services PMI on Tuesday, but also avoided the Pound because of it. We did have though the ISM Non-Manufacturing PMI due from the US, which was forecast to be worse than previous.



I decided to sell US Dollars against the New Zealand Dollar as we know the NZD is very strong at the minute. I wasn't extremely confident with this trade because of the recent strength of the Euro, but analysts wouldn't shut up talking about this release so that simply tells us it's important! After a bit of choppiness, that Long trade materialised well for a nice profit. So far, 2/2.

Wednesday 7 January 2015

Now Wednesday was a fantastic day as we had the Euro inflation numbers. We all know what's happening with the Euro at the minute and the central bank had basically told us what these numbers were going to be; they were concerned about deflation. So let's match strong with weak again, I traded EUR/USD. I actually also had a quick trade on EUR/JPY on Wednesday at London open and took 20 pips from that.



So here's the chart for EUR/USD. We have a sell at London open because of these figures and I took 50 pips from this trade, again in and out. 4/4 so far...

Thursday 8 January 2015

Today, we had another trade simply handed to us based on the fundamentals. Based on US unemployment claims, they were due to be less than last month, positive for the US Dollar. All I had to do was find a weak currency to trade against. I bet you can guess... the Euro.



Here's the chart. I took another 50 pips from this trade, in and out again. So that's 5/5 for the week, because it's NFP tomorrow which normally causes huge market choppiness, so I'd rather sit out.

Final Word

The great thing about this method of trading is that we kind of know which way the market is going to go, because we know the reasons why.

We haven't had much feedback yet but it would be great for people to get involved in this thread, I believe I am sharing something extremely valuable.

Thanks
JP

Thanks greatly JP for the update. There is a lot of sense to your trading style. I can see your approach is highly configured towards the outcomes of an announcement given the breakout intent but was wondering whether you have considered serial correlation in which an announcement's impact either supports or contradicts prior announcements during the timeframe of a long term trend of secular nature (eg. overall monthly trend).

The reason for my interest here is that I have a hunch there is a compound detectable drift in price associated with serially correlated announcements (eg. all negative or all positive) on the longer term timeframes. If that is the case then in addition to whether an announcement is above/below analysts expectations, an assessment could be included such as the general impact in support of or contrary to previous announcements associated with the same long term price pattern (eg. trending or not). This would give an arrow to the bow for us trendies that are looking beyond a single breakout.

The more I think about it there are generally two forms of announcement. Those announcements relating to 'the state of the economy' which correlate with the underlying instrument such as NFP, GDP results etc. and those results that respond or seek to alter the state of affairs to the state of the economy such as fiscal measures like QE's. If we could categorise by type of announcement it might also assist in predictive ability. Generally, and this is an opionion only, those 'state of the economy reports' are serially correlated whereas fiscal responses tend to respond to the financial objectives of the host country and are often contrary to the general flow of economic news.

The more we pull apart and analyse the nature of the pending announcement, the more we might be able to incorporate some preferred bias in our directional assessment. Anyway.....food for thought.

Excellent info JP and am really appreciating it :-)

Hello JP, thanks for sharing your idea.
I like this method of trading. But as i looked in your last post , your sell position should be still floating negative . Have i underestood correctly or not?

green pips to you

Hey guys,
Have been following JP as I never really look into fundies so always good to get some ideas, cheers To me this one panned out as might have been expected. GBP has a higher than last forecast for Manufacturing Production and USD has negative forecast on NFP and unemployment rates. Using a pair strength indicator, GBP has been gaining on the USD on the hourly chart (see chart) and a simple buy on the London open would have netted some pips so far (5 min chart attached). Does this seem to be in line with your ideas?
Josh

Noellej

Thanks forbthe contribution. This is exactly as I mean. I wouldn't have traded against the Dollar as it is already strong fundamentally and we have NFP which although forecast to be worst. I would trade against the JPY. But jumping out of both trades after London open would net at least 30 pips in just a couple of hours.

You said something key too, we knew which way these would go because we knew the reasons

Yes will be interesting to watch this one for a while and see how I can go with it. Looking at the calender again, do you look at the days past news events and then trade that against upcoming news. Example, today AUD news came out negative, and we had the forecast news for GBP positive, looking at the chart now afterwards another simple trade on the London open would have netted some pips too, taking the AUD as weak and the possible strength in the GBP and trading long on GBPAUD. Is this another way you look at placing trades or do you like to look at longer term fundamentals?

@Nollej

This looks yes like a great setup. The answer to your question is, it depends. We know that the AUD is fairly stable as their interest rate and inflation is round their targets. That particular news event also depends on what the Central bank are focusing on. If they are focusing on consumer spending or retail, something relating to that report, then yes it makes sense to trade. And it looks as though they probably are.

That is the main thing that we have to be aware of what the central bank are focused on. A few months ago there was a week where the pound fell against the dollar. We had some negative Average Claimants Count Change data but the rest for that week was positive. The secret here was that the central bank had said before that release that they were focusing on that and nothing else. If we were out of touch with the central bank, we would have lost a lot of pip there trading strong for the dollar on the other releases.

Please feel free to post other examples, it's good for people to see.

@Copernicus

This is something ive been looking at recently. This should theoretically work if there are only one or two important events in the week. Again it's about the central bank. This week would have been good with the EURUSD pair because of the looming Fed hike, and the QE talk from ECB. We also had the inflation figures from the EURO.

Try it on a demo mate, or real. You'll probably make money because we know which way the currency will go.

Hi,
I'm back to work now, so won't be posting much, but fundamentals with a directional bias reminds me of punctuated equilibrium. Stephen Jay Gould was one of my favorite writers (I really liked "The Panda's Thumb.")
Anyway, if the markets are like the paleontological record, then the stronger employment number for the USD may translate into a continued and fairly even trend and the Euro dito after the Greece election on the 25th. What I mean is, the markets seem to change and hold the change somewhat for awhile. How long? Couple months?

And when do you know what the bias will be? Sometimes the releases in the news are followed by a swift move and reversal. Perhaps what the market does on the very next no release or minor release days are an indicator of what the imminently tradable bias will be, since there won't be anything to interfere with what the main market movers (banks and funds) are thinking and doing... as in, no new numbers, so keep doing the same old thing.
Would keeping up with previous numbers and reactions be necessary so that you could recognize a "this changes everything" number?

Thanks.

@Bobart

I think what you're talking about at the end is food for thought. But the way I look at it is that if the central bank start talking about it, and that a particular release is going to affect something economically longer term, then yes it is important. But if the central bank don't mention it, then no, our longer-term bias remains the same. At the end of the day, if the central banks mention it then it will probably be in conjunction with how it MAY affect interest rates in the future. And that's when we have to be concerned, because that's when investors will look and be cautious also.

Hello JP, thanks for sharing your idea.
I like this method of trading. But as i looked in your last post , your sell position should be still floating negative . Have i underestood correctly or not?
green pips to you

@Kasrafx

Many thanks for you interest. Yes that's correct, it should. There are reasons why, which boils down to the Fed. With thse intra-day trades, you can hold for a large number of pips and it will pay off like we saw with GBP/NZD on Monday, but typically it is better to get in and out for say 30 pips. We are trading on sentiment. Many people just know the term fundamentals but technically this is sentiment trading, as for this short time the sentiment of the market is that particular way. Hope this helps, and if you have any other questions please feel free to ask.

I came across some very simple, yet informative information today. It was an article about how currencies react to the daily fix on Gold and Oil prices.
I'm sure everyone is interested in the London and New York opens, and in which direction the Euro or Dollar is headed for the trading session.
I never connected the dots on this very simple trading information. Just goes to show you, your never too old to learn.
Anyway here is what I learned. If Gold prices are up , then the USD is going to trade lower(Sell), the Euro trade will be Long. This is not just the Euro/USD
pair. Any currency related to the 2 currencies will be involved, in relation to the daily Gold Fix.
Another item of interest was related to the daily price of Oil and the Canadian currency. If Oil prices are down for the day, then the Canadian currency is a SELL.
So, what I'm going to do is start monitoring Gold and Oil prices in Real Time quotes. No doubt gold and oil prices fluctuate, however ,I believe they could be alittle more stable once the morning fix has been set. Any comments on this info or strategies in regards to this post?

@Charismatic

Many thanks for your input. Yes I am aware that commodities prices all over the world and in different markets affect the currencies around the world but I have never made the connection which you've mentioned. It makes sense, and we have seen that the Canadian Dollar has lost value because of the plummet of oil prices recently.

Let me know how your investigation goes, it would be great to hear about it. Very interesting.

Thanks
JP

http://www.fxdayjob.com/correlating-forex-pairs-2251/


Here is the link to the article I am referring to. It is in the last 2 or 3 paragraphs on the page. I was investigating maybe a play on the EURO/USD and USD/CHF. Buy one versus selling the other depending on the trend. Then I came to the Commodity part of the article and light bulbs lit up. This is perhaps a way to aide in determining the trend of certain currencies for the day.
The only way I see the Bull Run of the Dollar coming to an end ,is for Gold prices to go up. The moment the Feds hinted there may be an interest rate hike in 6 months,the USD has sky rocketed. If in fact there is a rate hike in 6 months, then Gold must rise in price to counter act those interest rates, correct?
How else are the other currencies going to get out of the Cellar? The Euro is closing in on a lows not seen in many years. It will be interesting to watch how this plays out.
My guess is Gold will rise in the next few weeks, giving us a play on the Euro and Aussie. Just this Friday the EURO was up for the day, something rare indeed, perhaps a reversal is in the making? As for oil prices and the Canadian currency, your guess is as good as mine.
I'm leaning toward higher oil and a higher Canadian, in a couple of months or early Spring.

@Charismatic

Interesting article there sir. I'm not sure on the correlation to be honest.

I did see this article... http://finance.yahoo.com/news/why-go...170016117.html

It maybe seems logical that they have an inverse correlation. All the money in the world used to be backed by Gold. Not literally but technically whatever money you had in a currency, there was some gold somewhere that kind of belonged to you.

Now, all currencies are backed by the US Dollar. Since prices in all markets for anything rise and fall based on supply and demand fundamentally, then if the value of the Dollar decreases, this means demand has dropped. Since currencies used to be backed by Gold, many people will still hold gold as a safe asset to protect against currency movements. So in theory, this could mean that as the Dollar falls due to less demand, people look for safer ways to keep their money, thus buying gold, thus increasing demand for gold, thus the price rising. This may not be true but this is how I see it, although even if the Trade Weighted USD value got back up to the 130.00 level, I can't see Gold dropping back down to the 400USD/oz level.

Based on that, because of the recent strengthening of the dollar, maybe you could expect the price of Gold to drop even further.

Remember the underlying movements are supply and demand which relate to all these economic factors for investors.

I do believe though that IF gold prices rise, that won't be the reason for the Dollar to stop it's bull run. The dollars bull run is because of the interest rates because as interest rates are higher, investors get a better yield on their money in that country. So the only way the bull run will stop, LONG TERM, is for the Fed to say they're not hiking interest rates. That may then affect the price of Gold, but it is the economy (central bank and economic data) which affect the movements..

Maybe it will, but this seems a huge drop for Gold which is still considered a very safe asset. Who knows...

I wouldn't expect money to flow into gold, nothing at the moment seems to indicate that is going to happen.

Gold is really a hedge against paper money, when the FED started their QE program many thought it would lead to hyperinflation - they were wrong, but that is what drove gold price higher, and down after the crisis went away.

Money prefers to move into the US dollar, mostly because it is less volatile and more liquid, investors much prefer a liquid safe haven.

The threat of deflation around the world could force the metals much lower again. I can't personally see gold going higher save for another global crisis.