The good news is that it is not important to know fundamentals to make money trading forex. Fundamentals and technicals can both be profitable or unprofitable. But they have very different attributes.
Fundamentals can be very good at determining the value of a currency pair. Knowing that a pair is worth 1.60 when it is trading 1.40 is very valuable information. Knowing that will cause me to trade that pair only from the long side. Fundamentals can also give us a lot of confidence in our positions because we have a firm understanding of what is going on. In addition, fundamental analysis can enable us to differentiate between different potential trades. “This trade is better than that trade because the fundamentals are more bullish.”
But fundamentals have some serious problems. The biggest one is when your analysis is wrong. Then that confidence becomes a deathtrap. That pair is worth 1.60 and the market is 1.40. I should buy. The market moves down to 1.30. I should mortgage my house. The market drifts even lower to 1.20. I should sell my kids. At 1.10, I’m bankrupt. To paraphrase John Maynard Keynes, the market can remain irrational longer than you can remain solvent.
Technicals are also both good and bad. One bad factor is that you can’t differentiate between trades. A breakout in two different pairs has to be treated as the same.
The best thing about technical analysis is that it gives you a place to put a stop. And that is very powerful. In fact, that one simple factor is of incredible importance. Let me demonstrate.
I once invented what I called the World’s Most Stupid Trading System. It was very simple. I took a period of time of roughly ten years in soybeans.
The rules were that I would buy on the open and place a ten cent trailing stop from the highs. I would buy again on the next day’s open if I was stopped out. Simple! Stupid!
As you can imagine, I made money in bull markets because I was only allowed to buy. The market would run for a period of time before I would get stopped out. In bear markets, I lost a lot of money because I was getting stopped out a lot. But the method made money over the whole time frame! The reason was simple. I cut my losses and let my profits run. The simple placement of a stupid arbitrary stop loss was enough to create a profitable system. Another epiphany.
This shows that probably the most significant attribute of technical analysis is the ability to set a reasonable stop loss. In other words, technical analysis allows us to cut our losses and let our profits run.
The ideal trading method would be to combine fundamentals and technicals. Easier said than done.
In the final analysis, if a gun was put to my head, and if I were forced to choose between fundamentals and technicals, I would pick technicals.
For the simple reason that it provides clear entry and exit points. This is very important for one’s psychology and risk management. As I have mentioned a million times, these are the two most important factors for trading success so the fact that technical analysis supports them better than fundamentals puts me in the technicals camp if I have to choose between the two.
The purpose of all analysis is to put us in tune with the market. We want to understand what the market is telling us and get in sync. That is the only way to make big money.
We cannot and should not fight the market. It is bigger, faster, stronger, and better looking than I am. I will lose all fights. But let me get in tune with the market and I can surf that wave to serious money.
Source: Fundamentals Versus Technicals, Should We Take It Both?
