Forex: Don't Lose Sight Of Fundamentals Or Your Long Term View

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During the twenty years that I worked in forex dealing rooms around the world one question made me laugh more than any other. When people found out what I did for a living they would frequently ask something along the lines of “I’m going to Mexico (or wherever) in ten weeks, should I buy my currency now?” I would gently point out that a) I didn’t trade the Peso (or whatever) and b) I was a spot guy and as such was paid to know where the market was going in the next 10 seconds or minutes, not 10 weeks.

Both excuses for not giving an opinion were true to some extent, but in reality every trader I knew had an opinion on other currencies as well as their own and each had a long term view. We couldn’t avoid it. We were intensely aware of the interaction between markets, so didn’t look at our own currency pair in a bubble, nor just in one time frame. For those new to forex it is easy to get too caught up in the moment and forget about your long term, big picture goal. This can be a mistake.

Most look at technical signals of some kind to suggest trades. I was taught to use only simple chart reading for this purpose. If a signal is secret and so complicated that only you can divine it, then it has no use. What makes technical signals work is that others see them and trade on them; it is this collective action, not some mystical property of the numbers that creates movement. Even so, the vast majority of trades on any given day were suggested by simple technical signals; ranges, channels and simple breakouts mainly. We never, however, lost sight of our long term fundamental view.

This is what usually, when you stop and think, explains the seemingly inexplicable move. Everything can look set up for EUR/USD to jump or for support to hold but if it is in a fundamental, long term readjustment that move will be at best muted. I was reminded of that this morning.

Just after 8:00 EUR/USD was bouncing around a well defined support level just below 1.3610. That level not only coincided with the previous low but also was the bottom of a defined channel from a longer term look (solid red line). There were several things that would suggest the level would hold, but I was confident it would break through.

There are larger dynamics at play here. Right now worries about deflation have led to the ECB adopting ever looser monetary policy, even playing with the idea of negative rates. The Fed, while hardly hawkish, is, at the same time, continuing to gradually exit QE. As I have pointed out before, the unemployment situation in Europe’s peripheral countries is not that much better than in the Euro crisis days. I have been bearish EUR/USD from a big picture perspective for a month or so and remain that way. A test of February’s 1.3477 low looks likely to me over the next few days or weeks.

The point is that even when you are looking at a short term play such as a bounce off of support, you should never lose sight of your long term view. There is nothing more frustrating than being long when your fundamental view tells you that a market is going down or vice versa, but it is easy to do if you look only at short term signals. Frustration in traders usually lead to bad decisions and what started out as just another wrong position can quickly become a disaster if frustration is added to the mix.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




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Martin Tillier


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