Most traders today use technical analysis to trade. This refers to techniques based on price and other objective data that result from market action. The technician’s credo is “Everything is in the market price.” The factors examined in fundamental analysis, such as a country’s income, gross national product, and interest rates certainly drive currency prices in the long run. The problem for the currency trader is, as Keynes said, “In the long run we are all dead.” The FOREX markets are highly leveraged; this is one of their main attractions. You can be correct about a currency pair in the long run, but the leverage may cause a price movement more than ample in degree to take you out of the market before you can profit from being correct about the fundamentals. It is discouraging to be correct in your determination of longterm trend direction for example, “Interest rates will drive the U.S. dollar loweragainst the euro” but lose money because volatility and leverage cause so many short term fluctuations that you are never able to board the long-term trend successfully.
No one denies that fundamentals such as money supply, labor statistics, political events, and many others drive the currency markets. The problem and why most traders use technical analysis is how to interpret them, especially in the short term. Most fundamental information is quantitative but much is not. For example, how does a trader convert an unemployment statistic to a price value? To further complicate matters, there are hundreds of fundamentals that impact
prices, and the matrix of possibilities is astronomical. And some fundamentals such as geopolitical events, are not even quantifiable.
The prices tracked hourly for 30 days on EUR/USD were ultimately driven by a wide range of fundamentals. But how does the trader discern them in advance? Technical analysis allows you to zoom in as close to the markets as you want. In fact, an advantage of technical analysis is the ability to visualize the markets at multiple price levels simultaneously. There is no perfect world, of course. Fundamentalists will counter that the prices you use to do technical analysis are already history by the time you do your calculations, and they have no rational effect on the future prices.
But a simple example will show this concept to be incorrect, at least in theory. It is true that after I enter my order to buy or sell, I have had all the impact on prices that I will have until I enter the opposite order to exit the market. Yet every trader has a propensity to exit the market, once entered, on variable factors of price and time. At what price will I take a profit? At what price will I take a loss? How long am I willing to stay in a trade? These propensities vary from trader to trader, but the aggregate of all propensities creates a push and pull on the market that should, again in theory, be measurable.
All traders have access to market prices; the same cannot be said of fundamentals. There are literally millions of fundamental factors in any given currency, and the relationships among them are in the billions. Someone will almost certainly know a piece of fundamental information before you do. And how do you translate a fundamental like gross domestic product (GDP) to a specific market value or even a specific entry price? To add gasoline to the fire, remember that these relationships are almost certainly nonlinear and are changing rapidly all the time. Fundamental traders conclude that prices have no memory and that only raw fundamental information drives the markets. The following is only a partial list of potential fundamentals for the U.S. dollar (USD). Other countries will have similar lists. Now, don’t you really want to be a technical trader!
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