By Rob Colville on September 11, 2015 in
There are all kinds of so-called “personalities” in the markets, from technical traders to fundamental traders, hybrids and intermarket practitioners, and everything in between. I happen to consider myself a “pure price action” trader, for example, although I don’t identify only alongside technical traders, and I don’t believe you should, either. Here’s why:
Even while trading based only on price action 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’ll discuss here today. While not necessarily chart-based, these factors are very prominent and weigh heavily on modern-day markets and trades, making them well worth watching, even by the most devout technical traders.
With newfound volatility now sweeping across world equity and currency markets, much of the focus has been on news and economic data out of China, the US, and the Eurozone, but another key driver of intraday and short-term price action has been the movement of oil prices, a largely fundamental factor technical traders won’t notice if only fixated on the intraday, daily, and/or weekly charts of the currency pair(s) they’re trading.
Especially when trading commodity currencies like the Canadian dollar (CAD) or Australian dollar (AUD), pay particular attention to intraday and short-term trends in the oil market, which are likely to impact momentum and the duration of trend moves. Just this week, for example, headwinds caused by weak oil prices led us to plan an exit strategy and take profits on a CAD long position that had moved decidedly in our favor over the last 7 weeks.
Scouting New Trades: Consider whether prospective trade set-ups will be impacted by oil prices, and trade only patterns with a strong technical basis if facing any oil-related headwinds. Technical traders should continue to take quality set-ups, but remain highly selective, as weaker patterns are more likely to be invalidated without the support of these key fundamentals.
Managing Existing Positions: Like the CAD trade we mentioned, existing positions may see momentum stall or dry up, or 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, as it lacks the added catalyst needed to punch through…so place stops and take profits accordingly.
Technical traders in this modern era now have more outside factors to consider than ever before. From algorithms and black boxes, which account for slightly more than half of all intraday market volume, to ongoing government and central bank currency intervention, there’s plenty happening “off the charts” that directly impacts the price action we see on them. That’s why stories about changing interest rates and quantitative easing are in the news and financial media each day, and we’ve seen huge intraday price swings across equity and currency markets of late on the heels of those stories.
Amid this largely unprecedented central bank intervention—and, in some cases like China, outright manipulation—massive fundamental forces are in play that simply will move currencies in a desired direction, and technical traders can’t fight those fundamentals. That’s yet another reason why even technical traders must now be at least somewhat fundamentally driven…but it’s not the only one.
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’s often basis enough for a trend trade, and technical traders could then simply take to the charts to find a valid and risk-controlled entry point.
One well-publicized example is in EUR/USD, where we have the US Federal Reserve 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, and while it’s a fundamentally inspired set-up, even technical traders would very readily see this one coming.
As I reflect back on our recent Market Insider Webinars, where we technical traders assess price action across major equity and currency markets, do you know what I see? Beyond the set-ups, I see a number of fundamental forces at play in all of these markets; forces that, even as technical traders, factor into each of our trade decisions.
That’s why we routinely discuss oil and commodity prices, central bank policy measures, and known seasonal and intermarket relationships, yet we remain technical traders right down to the core! So while it’s not time to rethink the whole technical vs. fundamental relationship, at least make sure that while trading by the charts, you always know about the key fundamental drivers impacting the markets and currencies you trade.