Trade Forex Fundamentally

I told you that to make money trading forex it’s all about recognizing sentiment and behavior, right? Well, the following is key: The most money to be made is when a “Gestalt Shift” or perceptual shift occurs in the market. I don’t mean to get all “philosophical” on you, but the market is a very social phenomenon. Once an idea cataches on, it really attracts attention and traders become fixated on the idea, while losing sight of the bigger picture as it evolves.  A trend will keep going based on one premise/topic until something happens to shift traders’ minds to another topic that could reverse price. What I want to show you in this forex trading tutorial is how to recognize changes in the trend using these “Gestalt Shifts,” and being on the right side of the money flow.

What pop music can teach you about trading forex

There’s always something that’s in vogue, which then goes out of fashion, as the masses turn to something else. Who is perhaps the most infamous pop icon in the last decade or two? Arguably we could say that Britney Spears (love her or hate her) defined pop music among teenagers up to the turn of the millenium. Teenage girls were excited about her, dance music in clubs blasted her music, and guys, although they didn’t care for her music, were definitely attracted to her. Then what happened? Terrorist attacks, war, economic problems, and other events changed culture in the US and who surpasses Britney and tops the charts in 2003? Norah Jones, whose smooth, low key music and gentle face almost embodies the anti-Brittney Spears. The media and the masses lost interest in the power-pop anthems from Britney and started focusing on something else that was more fitting for the times.

What Britney Spears and Norah Jones can teach you about how to make money trading forex

What’s my point? Markets move through fads just like people do. It’s important to realize that ideas start, catch momentum, and fade out during the rise of another idea in the consciousness of the markets. The key to profiting from these ebbs and flows of sentiment is essentially to recognize the events that represent the catalysts for change in focus of the market (a.k.a. Gestalt Shift).

Here’s how to make money trading forex with news headlines:

1. Watch for a solid trend to develop on the daily chart of a currency pair, and expect price to reverse soon if price has been ranging recently or an imbalance is developing (we covered imbalances in an earlier post)
2. Go to a news source that everyone reads such as Bloomberg, the Financial Times, or the Wall Street Journal. Even FX Investment Bank reports will do here.
3. Just read the headlines and the first few sentences and extract out common keywords, topics, and themes: these keywords and topics (e.g. “high inflation,” “increasing interest rates”) represent the current focus of the market.
4. Watch this once a day and listen for the market chatter to slow down and change tone to a different set of keywords and topics (e.g. “inflation has peaked,” or “interest rate rise halted”). This happens not instantly but rather takes a couple of weeks.
5. If price moves abnormally strongly in the opposite direction of the latest trend due to such a change in tone, it’s time to switch direction in your trading and align yourself with the new forex trend and sentiment because large institutions are unwinding their positions, which takes considerable time.

Example

Say that price on USD/CAD is at 1.1000 and starts to trend upward based on the new fixation of the market on the possibility of US interest rates rising, which is positive. Then after a few more weeks, the market starts to talk about a different topic: economic growth in Canada due to rising demand for commodities, which puts downward pressure on the USD/CAD pair. If the new perception (a.k.a. “Gestalt Shift”) were to directly refute the original perception (e.g. the market perceives US rates to not go up at all), price would likely head back to 1.1000 where it started and range there while waiting for more information.