In this episode of Truth About FX, Walter walks you through using fundamental analysis in “predicting” future shifts in interest rates — from a technical trader’s view — and how you can take advantage of expectations. He takes the example of an important political figure’s speech that changed the anticipation towards GBP and how this kind of news can really make or break your trade. He also recommends “solid” traders for those that are looking for the “secret sauce” of fundamental trading.
Download (Duration: 07:21 / 8.41 MB)
In This Episode:
00:37 – play off
02:49 – surprise news
04:41 – naked chart
06:30 – get out
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. How do I use fundamental analysis to determine the future or expected interest rates changes by Central Banks?
Walter: Well, I’m really more of a technical trader, that’s what I’ll say about that. Here is what you can do. You can play off of the expectations — and I think that’s what most fundamental traders do. They play off expectations.
For example, as we are recording this, yesterday I was doing a webinar with some traders and we were like 13 minutes away from some major news in the United Kingdom.
What was happening on the charts was the chart was a really bullish chart on the Pound. I was looking at the GBP/USD and I said, “I don’t know what she’s going to say.” It was the Prime Minister Theresa May and she’s going to make an announcement.
I said, “I don’t know what she’s going to say” — and I’ll post this video for those of you that are interested in this. I’ll post it in the shownotes so you can see what I’m talking about. It was a very bullish pattern on the H1 chart. I don’t know what she’s going to say but my guess is it’s going to be bullish for the Pound.
The only reason I say that is because I see a bullish pattern here. Now, nobody knew what she’s going to say except for a few — probably speechwriters or whatever — and the Pound was actually kind of doing like a fake out move or was like moving down and then wobbling around and getting really volatile on the back of her announcement which was 13 minutes away at the time of the recording of the webinar.
Or, at least at the time, we’re looking at the chart and so what end up happening was she said, “Yeah, we’re going to have a surprise election”. She called an election and that wasn’t really expected at all and the Pound took off massively.
I’m sure you know, you saw the charts last night too or in this morning or whatever. It took off so it popped. Now, what’s interesting about that isn’t really that the fundamental news drove it.
To me, what’s interesting about that is you could see the bullish pattern on the chart long before she opens her mouth and because the market was sending it down. I’ve noticed this a lot that when you see this really crazy news releases, sometimes what you’ll see is if the market is really going strongly in one way. It’s going to rebound and go the other way when the news actually comes out.
I don’t really think there’s any secret sauce to trading fundamentally. At least I haven’t figure it out and I’m not really interested anyway but I would say this if you’re going to pay attention to the news, I would pay attention to surprise news.
That is really the only type of news that I’d be able to trade which is where everyone expects one thing and it ends up being completely different. That gives you a chance for you to get in on something kind of cool. That’s the extent of it.
I also sent out an email to people which is kind of a tongue and cheek that I thought but it was a real trade idea where we’re looking at three different markets. I think it’s the SGD, XAU and MXN against the USD. MXN/USD, SGD/USD and XAU/USD and this was in advance of the election that Trump surprised did won.
I said, “Look, it doesn’t really matter if Trump wins or losses but he’s got to make it close. If he makes it close, there’s going to be a trade on the SGD/USD, on XAU/USD and on the MXN/USD. “
And that end up being the case. The worst trade of the three was the XAU because it happens so quickly and it bounced so hard but the SGD/USD I held up for a couple of weeks. The MXN/USD also took off so, they we’re both really good trades.
The XAU/USD was kind of quick and may or may not work out for people but the point is that is how I view fundamental analysis. It’s probably the easiest way for most technical traders to trade it.
Just look for that surprise and, if there is a surprise, then jump on it because the market is kind of caught off-guard and it’s like a breakout trade. If you’re familiar with break out trading, that’s kind of what you get when you get news surprise.
So, that’s really my only recommendation. If you’re interested in fundamental analysis, I would definitely check out those people who are good at it so [0426 confirm the names please] Jareth Davies, Wayne McDowell all of those people are really good at that solid trading and I would look at any of those guys and follow their stuff if that is something that really calls to you.
To me, I am more of a chartist I just see the naked charts and I trade off of that. Hopefully that’s a helpful answer anyway.
Hugh: So, how much of a follow through do these moves have after an expected news?
Walter: You nailed it. That’s a $2 Million question. The way that I do it typically is I’ll do this: I will trade it as a breakout on M5 candle so if I’m waiting for the news to happen, see the election with Trump and Clinton was a little bit different because that was like a non-going thing and it’s slowly unfolding.
I took the trade early. I saw a Kangaroo Tail on SGD/USD and I was in. I got in on that a little bit early but that’s because it was an unfolding thing and it was clear that she wasn’t going to walk away with the election. You know what I mean?
As that start to become clear, I said “Okay, it’s time to take a trade” so before they called it. Again that whole thing was a little bit different because it was like, “Look, I don’t care if Trump wins but I do care if he makes it close because if he makes it close, he’s going to shake people”. That basically what happens.
Now, with the news non-farm payroll, interest announcement, price surprise, data comes out and everyone shocked that it went in the other direction or whatever. Well, what you can do with that is you use the M5 candle as a break out. That’s how I do it.
To answer your question, I look to do two things. I look to slap a trailing exit on it and I look to a really far away target. If I’m on a Friday trade, then sometimes what I’ll do is — because I noticed that the last 2 or 3 hours of the day like from about 2 to 3 pm New York time the market will often retrace.
That the strong move of Friday, if there is a strong move, I’ll look to get out then that’s my goal but if it goes really far on your direction and you can handle the widespread that you’re going to get over the weekend. How you get that widespread and on Monday and stuff when or Sunday depending on where you are when it fires up. Again, if you can handle that because you’re in so much profit then a trailing exit makes sense.
To answer your question, I don’t really have an answer to know how far it’s going to, how much follow through but I usually have a target and I usually use a trailing exit to just lock it in if it’s really going to go. That is how I approach it.
Hugh: Okay, cool. That’s a super helpful tip. Thanks, Walter.
Walter: Yeah, no problem. Thanks for the question.