So You Follow the Fundamentals do You?

Posted On 11 Feb 2015

Firstly, let me begin this article by sincerely thanking each and every one of you who voted for myself and Rick Wright in this year’s FXStreet FX Best Awards 2015. We are both incredibly proud to have won the award for Best Newsletter and I am also hugely honored to have also won the Best Educator award as well. It’s all thanks to your ongoing support, so again a huge thanks to you all!

This week I am just finishing up a Professional Forex Trader class in Philadelphia and we have had a great week of trading and education to say the least. Some weeks, the currency market really comes alive and this, thankfully, was one such week for sure. While there were plenty of awesome opportunities to put the Online Trading Academy Core Strategy to work, one set in particular stood out from the rest, as it perfectly demonstrated why I always trust the charts over anything else. Sure there are many fundamentals that we are told shape the valuations of currencies; but if you know what you are looking for, you will soon come to see that the only thing that consistently moves markets is the law of Supply and Demand. When institutions create large imbalances between the buy and sell orders placed in the markets, this offers us exceptionally low risk and high reward trading opportunities each and every day.

Even when you fully understand this powerful dynamic it is of vital importance to recognize that you are not seduced into deviating from your trading plan or letting anything influence you into doing the wrong thing at the wrong time. Following those fundamentals is just such a trap that we must be aware of at all times if we ever hope to achieve consistency in the FX markets. Earlier this week we had an economic announcement which always impacts the markets, and what a great example it proved to be. It came in the form of the monthly Interest Rate announcement from the Reserve Bank of Australia. As you may know, from a fundamental perspective, if a nation raises interest rates we would expect that to create demand for that currency as the yields are higher. In reverse, we would also expect that a lowering of the rates would result in a devaluation of the currency. Ask anyone who knows just a little about FX trading and they will tell you exactly the same thing.

On Monday 2nd February, the RBA decided to lower rates in Australia from 2.50% to 2.25%. With this decision we would obviously expect a fall in the price of the Aussie Dollar, as from a fundamental perspective this is not good for the currency. Looking at a price chart below we can see that the AUDUSD paring did indeed fall but not for long:

Immediately after the rate announcement the pair dropped around 150 pips, only to sharply reverse the losses completely with prices ironically now trading around the exact same level they were at when the news was released. Is it any wonder why so many FX traders are left in frustration when events like this occur? Surely something as major as a rate statement should not defy the logic of the fundamentals? If you are feeling that frustration I can completely understand as I have been there myself in the past, yet I later learned that news does not create a market, but rather buying and selling does. Take an Online Trading Academy class and you will soon learn that institutions tend to drive the market with their orders, and when these orders are imbalanced an opportunity is created for the educated and astute market trader. Simply put, when Supply is greater than Demand the prices must fall, and when Demand is greater than Supply the prices must rise. Our job is to know where these imbalances are on a price chart.

Things become much clearer when we look to where the drop in the AUDUSD ended and the rally began. Just track the lows back in time and you will see where the banks were buying Aussie Dollars last time:

The above example clearly shows the huge imbalance created at the Demand level last time prices were in this region. For some reason the big market players wanted to buy a lot of Australian Dollars, so who am I to assume that they won’t do the same again the next time prices fall to this level? Rather than trust the news, I choose to trust the charts which, as we can see, made perfect sense in the end.

So, what about the news I hear, you ask? Well, I’m the wrong guy to ask to be honest. Instead of wondering why the AUDUSD did the opposite to what we would have expected it to do after the news, I choose to simply listen to the price alone and let others worry about the “what” and “whys.” I need to just focus on my plan and let that do the work for me, as I’ll never really have all the answers after all. As long as I have the opportunities laid out in front of me I’ll carry on just fine.