the problem of fundamental analysis is not simple. A fundamental trader
needs to work hard to earn his bread. To carry out fundamental analysis
effectively, a trader needs to have a deep understanding of macroeconomics,
international finances, and political and social processes. He needs to
adequately evaluate certain events and consider their influence on a specific
currency rate, and he needs to forecast market trends in order to gain
profit from the results of previous political or economic changes. The influence
of each event or news should be estimated, considering all other
factors affecting the market and a specific currency rate. However, even
skilled economists, financial experts, political scientists, and professional
market analysts are sometimes unable to complete this task. Also, the majority
of small individual speculators often cannot evaluate the importance
of a particular fundamental factor for the market.
In reality, market reaction to an obvious news event is often contradictory
and unexpected. Chances of a correct forecast of market trends are inversely
proportional to the number of traders sharing the same point of
view. In other words, most traders are more often wrong than right in their
understanding of fundamental events and phenomena, and their forecast of
near-future market movements based on the fundamental data is erroneous.
These are five paradoxes that I noticed regarding the issue of predicting
the market.
Paradox 1
The vast majority of FOREX traders are unable (because of their limited
competence in macroeconomics and finances) to interpret correctly many
of the various fundamental factors influencing the market, but the speculative
trade based on fundamental analysis is widespread among individual
traders-investors. Paradox 2 is interconnected with paradox 1.
Paradox 2
Despite the practical impossibility of forecasting market movements using
fundamental analysis, there is a simple, rational, and fundamental explanation
of previous market events and shifts after all.
It is relatively simple for the individual speculative trader who watches
the main economic data and has access to sources of financial information,
to predict the general trend of economic development of various countries.
Hence, it is simple to compare economic growth rates of two separate
countries or regions. This allows the trader to determine the main trends in
changing national currency rates with greater probability. The disadvantage
is the approximation used for the analysis, which is useless for shortterm
speculative operations because of the inaccurate determination of
levels of entering and exiting the market. This leads to the next paradox.
Paradox 3
The vast majority of traders use long-term global economic trends. Being
deliberate or forced proponents1 of short-term speculations, they are unable
to benefit from their own long-term forecasts and analyses.
A trader wants to know exactly why the various events and market
movements occur, but this knowledge cannot help him much. I think the
question Why? is of less importance to a trader, and cannot be compared
to the importance of other questions that traders should answer before
making their decisions. Questions like Where? When? and How many?
should be of more importance for a trader—especially those who trade
short-term positions or are involved in daily trading. In many cases, information
about various market movements is not important. If the trader
was late and did not take part in the previous movement, knowledge of
the exact causes of the rate fluctuations does not help. Even if the profitable
or unprofitable position was open at the moment of the market
movement, the knowledge of the exact causes cannot help to reimburse
losses or threaten the profit.
Sometimes, there could be certain exceptions to this rule, and these
exceptions do not upset the generally secondary importance of the question
Why? Exceptions include situations in which the long-term influence
of news events on the market should be evaluated. Even in these rare
cases, the trade operations based on the common sense method are possible
and preferable.
Paradox 4
Many traders, whom I know personally, usually spend much time discovering
and discussing the causes of previous fluctuations in the money
market. This knowledge has no practical value because by that time the
train has gone and the market has already reacted to certain fundamental
stimuli and the exchange rate is adjusted accordingly.
Complete Reading : ADVANTAGES AND DISADVANTAGES OF FUNDAMENTAL ANALYSIS
