When I trade against the fundamentals

However, one of the most common questions I receive from retail traders is whether there are occasions when I trade against the fundamentals. The answer is yes, and I’ll explain specific scenarios when I do so below. 

Consider the following example. If fundamental analysis tells me that a currency’s price is going to increase over a projected period of time - perhaps over a period of a month or two - it’s logical to assume that buying the currency is the step most traders would take. This thinking is absolutely correct. But as the majority of traders know, even if fundamental analysis points to a currency’s price increasing over the longer term, its price never just rallies in one direction. It fluctuates. So in this situation, despite the price being likely to increase over time, they’ll be shorter periods of pull-backs and sell-offs.

These periods of sell-offs represent opportunities for other traders to buy the currency and ride the positive fundamental trend of the currency’s price. For me, it’s an opportunity to make a profit, providing I have bought the currency at a moderately lower entry price. So if my analysis tells me that the sell-off period is likely to last for a day or two, I’ll get in the trade and ride the price down a few pips.

The difference here is that I will not hold a trade against a fundamental position for too long, simply because the chances of incurring losses are much greater when trading against fundamentals. Therefore, I place a tight stop loss when I trade in these periods of pull-backs and sell-offs to protect my capital. When I trade with the fundamentals, my use of stop losses is much less strict, in fact sometimes I don’t use them at all, such is my confidence in the fundamentals.  

What causes price to move against fundamental trends?

When price temporarily moves against the fundamental trend direction, it does so because of a change in something known as market sentiment. This can be described as the market’s mood, which tends to be fleeting in nature.

The causes of these temporary changes in the market’s mood come from all kinds of global news events.

Unusually bad weather is a good example of an event that causes a short-term shift against the fundamentals. International tensions over territory is another event that cause the markets to become anxious and move against fundamentals. A recent example of this is the dispute between Ukraine and Russia over Crimea. As the early phases of that dispute passed, it transformed global market sentiment to one of apprehension as the likelihood of conflict increased.  

The key here is for traders to become accustomed to monitoring news feeds for events that will trigger these periods of pull-backs and sell-offs for currencies with good fundamentals. From here, traders will be able to take advantage of those short periods of pull-backs and sell-offs.

Lastly, it’s important that traders maintain a focus on trading with the fundamentals too, as this approach will yield much more profitable results over the longer-term. Trading against the fundamentals is very much a short-term strategy to make moderate and quick returns. 

Jarratt Davis