Trade Forex Fundamentally

•Do you find yourself buying when you should really be selling and vice versa?

•Do technical analysis indicators tend to lie to you, resulting in losses?

•Are you getting caught up in the randomness of the market?

All of these problems and many others in forex trading can be avoided if you know:

1.  A move is going to happen, and:
2. Which direction the move is likely to occur in

View my recent guest webinar at ForexPros.com to learn the complete strategy!

Of course, this is a lot easier said then done, especially if all that you have are your forex charts and indicators. However, if you look beyond conventional technical analysis, you’ll find that the market leaves behind valuable clues about sentiment that lead to many profitable opportunities.

Sentiment is a valuable tool because it is much easier to determine than just price action itself. Sentiment is usually either bullish or bearish and its turning points are very visible compared to those of price.

One such way of identifying sentiment is by watching how price reacts to news events. Economic news (a.k.a. “fundamentals”) is important because certain high impact news events are factored in to big traders’ decisions to go long or short currency. For very high impact news events, the news release can be in focus both well before and well after the scheduled time for the release. It’s our job as profitable forex traders to take advantage of shifts in sentiment due to these news releases and get in on a move early.

I look for three ways to profit from price behavior due to fundamentals/sentiment:

1. Trading the ensuing momentum after price breaks out of a range convincingly and is supported by fundamental news
2. Trading a turning point in sentiment if price moves opposite of what the news release should dictate
3. Trade the “factoring-in” of price before the actual release takes place

If you want to learn some practical strategies that you can use today, please view the recent guest webinar I was invited to do by Forexpros.

View Webinar 3 on Forex News Sentiment Trading (FULL Video)

Watch my webinar on Currency Strength Sentiment with ForexPros!

Let me ask you some questions:

•Have you ever put a trade on only to see price immediately go against you?

•Does your trading strategy seem to perform perfectly in hindsight, and poorly when you trade it LIVE?

•Do you find yourself sometimes spiraling out of control trying to decide whether you should really buy or sell at a particular time or price level?

All of these problems are linked in some way to not getting the direction right in your trades at the right time. I’ve struggled with this a lot myself and it took a lot for me to finally come to the realization that I needed to find a way to determine the true underlying driving force of price action and to align my trades in the same direction. This underlying driving force I’m referring to is also known as sentiment and is responsible for most short and medium term moves you see in the forex market.

“Catch a wave, dude!”

I couldn’t help to think about the beautiful coastline of California with all of the surfers trying to catch waves. Why? Sentiment comes in waves in a similar way. I figured that if I had a way to figure out when a new wave was possibly coming and how to align myself near the start of the wave, I’d be set and making many forex profits. So here’s what I found.

I used a tool called a currency strength meter, which measures the individual strength of the major currencies. I figured out that there was almost always a situation where some currencies would be weak and some currencies would be very strong, but as time would pass, the weak ones became strong and the strong ones became weak. I noticed that this pattern happened in very smooth, predicatable waves and sought out to buy strengthening currencies and sell weakening currencies and found that 100s of pips per week were available with this method.

So what was actually happening here during these ebbs and flows of currency strength and weakness? Well, money was flowing from weak currencies to strong currencies as the big players were changing their feelings and thus positioning on the market. I realized that what I saw on the currency meter was merely a reflection of the periodic shifts in sentiment of the market. However, unlike price action, it was much smoother and more rhthmic, and told me more information about the market than price action did. I hope you use these forex trading secrets to your advantage. Please watch my webinar that Forexpros.com invited me to do recently, below:

Watch my webinar on Currency Strength Sentiment with ForexPros!

Don’t fall into the trap of the 90% losers in the forex market. These are the majority of fish who fall for the easy “bates” set by the more experienced players of the market. They follow the news of the major media outlets or follow obvious technical analysis patterns on price charts and chase the market. As I always say, if you want to achieve forex profits you need to understand the behavior of the market and execute your trades before everyone else realizes what’s going on. I mean, let’s face it. This is a highly competitive market with some really skilled players. If you want to achieve success trading forex you need to think outside the box a little. Here’s one of my strategies for being a contrarian and thinking outside the box:

“Buy the rumor and sell the fact”

 Here’s how the big dogs play in the forex market: The big banks and hedge funds have their own research teams of very talented economists who make forecasts on what important economic indicators (such as employment, GDP, and interest rates) are going to come out as. You may have seen the average of these economists’ predictions labeled as “forecast” or “consensus” on forex news calendar sites. The traders from these firms listen to the economists and put on their trades (long/short depending on whether the economic data is likely to have improved/deteriorated, respectively) well before the actual number is released. When the actual number is finally released, they may take off or lighten their position.

Now, these “big dogs” are responsible for moving the market with their really deep pockets. Wouldn’t you like to be riding on their backs and beating everyone else? You know that the majority of traders lose money, and what do the majority of traders do? Instead of buying the rumor, they are waiting for the fact to come out and are buying the fact as the big dogs happily unload their positions for a profit. Now do you see why retail traders lose so much money?

How to discover the rumor before everyone else does and beat the market 

1. Every Sunday, go to a news calendar such as that at Forexfactory.com and  look at what high impact news events are coming out in the coming week (usually in red, but the ones you should look out for are interest rates decisions, GDP, employment, manufacturing PMI, and retail sales)
2. Look for the forecasted number to have a deviation from last month’s number
3. Look at all of the economic data being released for that week on the calendar and also read the financial news (e.g. Bloomberg .com or FT.com) to see what the market is focused on. If the market seems to be focused only on one piece of economic data then you can count on a high possibility of a one-directional move. If there are multiple pieces of focus (e.g. employment data + central bank speech + GDP) then you will likely have choppy price reaction and trading this strategy is not advised
4. If the market seems to be anticipating one event, buy/sell a relevant currency pair in the direction of the forecast at the beginning of the week if it is a super high impact event (e.g. NFP, interest rate announcement) and between 12-36 hours before if it is a generally high impact event (e.g. retail sales). In essence, if the number is expected to be positive for a country, buy it’s currency and vice versa if it’s expected to be bad.
5. Get out up to an hour before the release. Well before is even better because you want to be away from the scene before the newbie traders come in and get cut up.

Example trade

Notice on the calendar we can see that Friday had two pieces of US economic data coming out: Advance GDP and Chicago PMI. The GDP number was supposed to come out at 2.5% vs. 3.7% previous, and PMI was coming out at 56.3 vs. 59.1 previous. These are big differences and indicate weakness in the US economy, prompting us to sell the Dollar. The EUR/USD pair was a good candidate for a trade because there were no other pieces of data that the market would lend a lot of focus to that week (even though German retail sales is normally a focus, GDP and PMI from the US take precedence because they are more significant). If we had entered at the beginning of the week on Sunday by shorting the Dollar and buying Euro (i.e. going long EUR/USD), a maximum of 178 pips, or $1,780 per standard lot could have been made!

Keep in mind that it’s going to take some practice to know which economic data work best with which currency pairs and when the best time to enter, but this is certainly a great edge to have.

Do you wish that you could put a trade on and see price quickly start moving in your direction instead of going against you right away? Do you want to have a sense of certainty as to whether a pull back in price is just a temporary dip rather than a trend change? Do you want to once and for all, run your profits and cut your losses short?

The key is getting direction right

I would always have the problem of getting stopped out even though when I eyeballed past price behavior on my chart it seemed like I should be winning a lot more trades. I soon came to realize that to really make money trading forex you need to align yourself to the underlying powerful driving forces in the market- in other words, sentiment. Sentiment is the driver of price in the medium term, and it is based on the changing perceptions and emotions of the human beings that run the market. That’s right- the market is made up of human beings, not lines, stochastic indicators, doji patterns, and economic data. Fortunately for us, predicting the decisions of human beings and thus sentiment is a lot easier than predicting price action. Also fortunately for us, they key to profits is more about getting direction right when sentiment is strong than it is about getting in at precise price levels and times.

Watch the FULL Webinar Replay of the Presentation I did on Sentiment with Forexpros!

Ways to measure sentiment objectively for forex profits

I use a number of different methods to analyze sentiment for a forex currency pair, but here are the 3 most powerful ones:

• Measuring individual currency strength and money flows
• COT positioning
• Price reaction to economic news releases

Measuring individual currency strength and money flows

The principle here is that large funds who deal in FX regularly assess their risk and opportunities for yield. If their collective sentiment shifts, large sums of money will flow from weakening currencies to strengthening currencies for weeks since their loading and unloading of positions are so large that they move the market. The way we can gauge these turning points in sentiment is by comparing individual performance on a currency meter or by manually comparing dozens of dollar crosses, yen crosses, etc. (will not be described here).

COT (Commitments of Traders) Positioning

COT data is released every week by the CFTC government regulatory organization and it tells the positioning of the two largest (and therefore market-moving) players in the market: “large speculators” (i.e. hedge funds and banks) and “commercials” (corporations who hedge their forex exposure). The large speculators are often responsible for the most immediate sentiment in the market and again have large positions that take time to put on or take off, so watching their positions increase or decrease are good indications that a medium term trend is forming.

Price Reaction to Economic News

Let’s make no mistake- economic news is an important driver of the market. When scheduled economic news gets released, you can bet that all the market movers are watching this to determine what their next move is going to be. If economic news comes out better or worse than expected the market usually moves up or down, respectively. When the market starts behaving in an opposite fashion (i.e. going down on a positive vs. expected employment figure) it’s a good bet that the market is shifting and beginning a trend in the other direction.

Please watch the webinar for step by step details on these strategies

Avoid the news?

Most forex traders I know use charts and technical analysis to make their forex trades, and are taught by so called “gurus” to completely avoid the market when news comes out, and in many cases, to even take off trades before news. My question is, why avoid trading during a period where price action actually behaves sensibly? In other words, price action actually moves due to traders’ reactions to new information about the economic state of a country, rather than some pattern or price level that may or may not have any predictive ability.

 

Save some time and watch for only the high probability trading opportunities

News isn’t something you should avoid. News is the only thing that you know for sure moves the market.  News has a much longer effect than just the knee jerk reaction immediately after the release and the next 5 minutes. The reason why news time has such a bad rap among traders is that many news events create random, whipsawing price action that can easily take out stops. So what does one do? Avoid trading during and after useless news events and only stick with ones that have strong cause-effect relationships (i.e. a surprise in the economic data has a high probability of producing a strong, one-directional move in a currency pair). These are:

• Interest rate announcements, statements, press conferences (including US FOMC minutes)
• Retail sales
• Manufacturing PMI, Chicago PMI, Ivey PMI
• Inflation/CPI
• German ZEW, IFO surveys
• US Employment (Non-farm payrolls), Canadian employment

3 ways to use news in your trading

Analyzing sentiment (and thus direction) using news releases can be a very powerful element of your forex trading strategy. I’m not talking about chasing the market after a news release- I’m talking about professional, calculated, profitable forex trading. Here are some ways to combine forex news trading with technical analysis so that you have a better chance of getting both the direction and timing right during your trades.

1.       Look for breakout due to important news surprise. Out of all the forex technical analysis methods out there, I don’t think any are as powerful as watching how price reacts to weekly (or even daily) highs and lows. All other things equal, if price breaks a high, it’s likely to continue going up, and vice versa for lows. The reason why such a simple strategy as this can result in depleted accounts is because it doesn’t take into account the momentum and behavior of the market. If you consider that the GBP/USD traders are reacting strongly to a surprise in the amount of retail sales in the UK, however, then a sustained upward move beyond the break of the high looks more likely, doesn’t it?  

2.       Trade retracement of a news spike. The easy days of waiting for a surprise in scheduled economic data and buying up a currency are long gone, as the competition is too fierce and brokers have implemented measures to make this practically impossible. However, that’s not to say that we can’t get into the move after the original price spike following the release. If you keep your eye on a 4-hour chart and see a clear break of a recent channel or weekly high after a surprise in economic data, wait for a retracement back down to the high and buy there.  

3.       Fade an “irrational” news move. I can’t tell you how many times I’ve seen price rocket upward 50-100 pips after a release only to come back down to right where it started a few hours later. Usually what happens is one of two things. First, the deviation between the market’s prediction and the actual economic number might be small (e.g. US retail sales is +0.3% vs. 0.1% expected), but nevertheless enough of a surprise to throw the market off and spur buying, or second, the news release turns out to be better than expected while in the recent past nearly all releases have been negative. In these situations I would look for a nearby technical resistance level, such as a weekly high, and short price when it gets to that level. Of course vice versa for the opposite scenario.