Focus on Fundamentals
Hello traders. Welcome to the Pro Trading Course and the third module, Swing Trades – Follow Global Macro Trends. In this first lesson of the third module, we are going to analyze why do we focus on fundamentals when we are trading the markets. And the reason is simple, fundamentals tells us whether a market is weak or strong, and by trading like a professional, you always want to be trading the side of the market that is going to yield the most return from your investment.
So, first of all let’s analyze why we focus on fundamentals. Even though price moves by the imbalance between buyers and sellers, there must be a reason why there are more buyers and sellers and vice versa in the market. The reason is fundamentals. Trading like a professional means focusing on taking the side of the market that is going to yield a better reward for your exposure. If fundamentals tells you that a market is weak, you are not going to be looking for buying opportunities. You are going to try to sell the rallies. And the reason is that those rallies on a weak market are just small retracements to the upside where you are going to find more sellers that are going to push price down. The same if fundamentals are strong, you are not going to be looking for sale opportunities, but rather buying those dips.
Now, we’re going to look at an example. And this first lesson is only built for you to understand why we use fundamentals in trading and not only focus on price action. So we’re going to look at an example of how price moves by the imbalance between buyers and sellers in a strong market.
So, right here we have on March 16th, the Federal Funds Rate that remained unchanged. The Federal Funds Rate on the United States, if you don’t know what it is, it’s simply the rate at which the banks lend each other money overnight. So, when the Federal Funds Rate is close to zero, this means that the Fed is looking at the US economy as a very weak one, and maintaining those interest rates close to zero is going to help the development of the weak economy. So an interest rate close to zero is weak or is dovish for the US dollar, which means that it’s going to devaluate the US dollar. In other terms, if the Fed decides to hike the Fed Fund Rate, this means that the Fed is looking at a better economy on the United States, and it’s taking a more hawkish approach to its monetary policies, which means that this is good for the US dollar.
But in this case or in this example, the Fed decided to maintain the Federal Funds Rate, which is very dovish. And I’m going to show you what happens. This is the one-hour chart and right here on this square, at this level, or at this red level, is where the announcement was made, and as you can see…well, price boomed, or the price on the Euro/US dollar boomed, and the price of the Euro/US Dollar went up because the US dollar was depreciating in the very short term. This is the one-hour chart and this is a couple of hours after the announcement, and as you can see, looking for sell opportunities in a strong market is out of the question. And I’m going to show you what happened a couple of days, even a couple of weeks later.
We had the move to the upside, then we had a retracement, and then a strong move to the upside. Now we are more than 300 PIPs above the level that we stayed in when the Federal Funds Rate numbers, or decision, was announced and we have moved all the way up here. And you can see that the moves to the upside are much, much stronger than the retracements to the downside and it’s very, very logical that with such weak fundamentals on the US dollar, you are not going to try to sell the Euro/US dollar, all right? And the reason is that even though if you nail this high and try to ride the retracement all the way to these levels, it’s going to be a very choppy ride. But if you decide and if you know how to read fundamentals, and you decide to only buy the dips on the Euro/US dollar, well it’s going to be a lot more easy to trade it and a lot more easy to make because the moves to the upside are sharper and stronger.
So this is why we are going to focus on fundamentals because we are looking at the entire picture, at the global picture. We are making money from global markets and we need to know which markets are strong and which markets are weak, for us to decide the side of the market we are going to be trading.