Fundamental Forces Even Technical Traders Can’t Ignore

There are all kinds of so-called "personalities" in the markets. This can be from technical traders to fundamental traders, hybrids and intermarket practitioners, and everything in between. I happen to consider myself a "pure price action" trader. Although I do not identify only alongside technical traders, and I do not believe you should, either. Here's why:

Even while price action trading based solely on the charts, technical traders must have a constant knowledge and understanding of certain fundamental factors that inevitably move markets.

So regardless of your particular technical strategy or the time frame(s) you trade, never be so committed to technical trading that you ignore altogether the critical fundamental themes we will discuss here today. While not necessarily chart pattern-based, these factors are very prominent and weigh heavily on modern-day markets and trend trades. This makes them well worth watching, even by the most devout technical traders.

Takeaways

• Why everyone is a technical and fundamental trader

• How an asset price can affect technical traders

• A profitable lesson in history

Oil's Fundamental Impact on Technical Traders

With volatile markets now sweeping across world equity and currency trading markets, much of the focus has been on news and economic data out the economic powers. This includes China, the US, and the Eurozone. Another key driver of intraday and short-term price action has been the movement of the oil price. This is a largely fundamental factor technical traders will not necessarily notice.  Indeed, this is especially the case if only fixated on the intraday, daily, and/or weekly charts of the currency pair(s) they are trading.

This applies when trading commodity currencies like the Canadian dollar (CAD) or Australian dollar (AUD). You should pay particular attention to intraday and short-term trends in the oil market. These are likely to impact momentum and the duration of trend moves.

Scouting New Trades: Consider whether prospective trade set-ups will be impacted by oil prices. Only trade only patterns with a strong technical analysis basis if facing any oil-related headwinds. Technical traders should continue to take quality set-ups.

Managing Existing Positions: existing positions may see momentum trading stall or dry up. This is because the overall strength and/or duration of trend moves be cut short by price action in the oil market. If trading affected currencies or assets, price is all the more likely to respect long-standing support or resistance. The lack of added catalyst needed to punch through could stop any more gains…so place stops and take profits accordingly.

Changing Monetary Policies & Central Bank Intervention

Technical traders in this modern era now have more outside factors, such as financial crisis's, to consider. Algorithms and black boxes now account for slightly more than half of all intraday market volume. You also have ongoing government and central bank monetary policy intervention. As a result, there is plenty happening "off the charts" that directly impacts the price action we see on them. That is why stories about changing interest rates and quantitative easing are in the news and financial media each day. This has caused huge intraday price swings across equity and currency markets.

This central bank intervention is largely unprecedented. In some cases, such as China, it is outright manipulation. As a result massive fundamental forces are in play. These will move currencies, and technical traders cannot fight those fundamentals. That is yet another reason why even technical traders must now be at least somewhat fundamentally driven.

How you can advantage of policy mismatches

You see, viable mid- and long-term trades can be built simply by trading two currencies whose central banks have a differing policy stance. If one bank is easing at the same time the other is tightening, that is often basis enough for a trend trade. Technical traders could then simply take to the charts to find a valid entry point with a suitable risk profile.

One well-publicized example is in EUR/USD from 2015. The US Federal Reserve was pursuing tighter monetary policy at a time when the European Central Bank is increasing its QE measures. These diverging policy measures would more than likely interact to produce sustained weakness in EUR/USD.

See also: Non-Major Currency Pairs That Are Just as Trade-Worthy

Conclusion

In today's volatile markets, I see a number of fundamental forces at play in all markets. These are forces that, even as technical traders, factor into each of our trade decisions.

That is why we routinely discuss oil and commodity prices and central bank policy measures.  Although we remain technical traders right down to the core, we are prepared to adjust! So make sure you always know about the key fundamental drivers impacting the markets and currencies you trade.