The nuances of applying fundamental and technical analysis to forex
Fundamental analysis of many novice traders seems like a simple tool for making easy money: wait for positive news and open a position in the direction of the trend. What is their disappointment when the price turns in the opposite direction? Something similar is happening with lovers of technical analysis. The main reason is the underestimation of the complexity of using these types of analysis. In this review, you will learn about the pitfalls of fundamental and technical analysis, as well as how to avoid them. And at the end of the article, look for some useful links for trading!
The dangers of applying fundamental and technical analyzes
Fundamental analysis is most attracted to novice traders. Is logical. Why understand the specifics of the use of indicators, if you can make money, for example, by issuing positive statistics, reporting or investing in top companies of the Alphabet, Apple class, will they still grow? What a surprise when the price turns in the opposite direction or starts to jump at all, breaking feet. At this moment, the suspicion creeps in that it is the broker who is manipulating the quotes to blame. Alas, it is human nature to blame anyone, but not yourself, for the mistakes. Although the matter is mainly in the trader himself, who did not take into account some factors.
Similarly with technical analysis. False signals of indicators are written off as the quotes are late or the broker is to blame again. For some reason, the fundamental factor is not taken into account. This review will briefly describe the traps of fundamental and technical analysis, which for some reason are not taken into account by novice traders. Experienced investors all know this, therefore, first of all, the article will be useful for beginners. Easy money does not exist!
Fundamental analysis traps
Fundamental analysis can be divided into several parts:
- Analysis of geopolitical and macroeconomic factors: GDP and labor market, the monetary policy of the Central Bank (discount rate, money supply control, etc.), statistics, the balance of payments, trade relations, force majeure, including local military conflicts.
- Analysis of individual industries: growth dynamics in percentage terms, prospects, level of demand, etc.
- Analysis of individual companies: financial performance.
1. Unjustified expectations
It is most appropriate to cite the stock market as an example. One of the common strategies for earning stocks is to enter the market at the time of publication of statistical data: financial statements, results of the work done (for example, shares of biotechnological companies react especially painfully to the failure of test studies of medicines), expansion to local markets, etc. The thesis seems to be logical: “Positive financial statements – an increase in the value of shares.” A classic mistake of novice traders who forget that any statistics are viewed in dynamics.
This chart shows two serious price collapses, which turned out to be the highest since 2012. On March 16, Facebook’s stock price fell by 6.8%. The reason was the publication in the media of information about the leak of personal data of 51.3 million users of the social network.
A comment. This is a good example of how the price reacts to all sorts of positive and negative reviews. A sharp drop in prices suggests that investors began to massively sell Facebook page. And now pay attention to how much one could earn by buying shares at the time the bottom is reached: for 4 months the price rose from 153.03 to 217.5 dollars. The USA. A great example of what should not panic: do not sell at the time of the collapse, buy at the bottom.
But we are interested in the second drop in price. Pay attention to how vertical and fast it is. On Wednesday, July 25, Facebook shares fell 24% immediately after the closure of major trading in the United States. The reason is the publication of financial statements:
- The company’s revenue for the quarter increased according to the report to 13.2 billion dollars. The USA, although it was expected to grow to 13.3 billion dollars. The USA;
- the growth rate of the monthly audience in the second quarter was 1.54% versus 3.14% in the first quarter;
- the number of daily active users was + 1.44% in the second quarter versus + 3.42% in the first;
- the number of users in Europe decreased from 377 to 376 million; in North America, it remained unchanged (241 million people).
As you can see, the company’s financial indicators for the second quarter were positive: there is an increase, there is a profit. But in comparison with the previous quarter, they turned out to be worse, which led to such a fall.
How not to fall into the trap :
- Analyze financial statistics for several periods, comparing it with forecast data (for stock markets). Evaluate industry reports over several periods.
- Track analytic reports and forums. But be careful – there are risks of possible manipulation.
- Diversify risks. Mistakes are inevitable and profit should cover the loss. It makes sense to invest in assets with a direct correlation.
And it’s worth separately mentioning such a phenomenon as a dividend gap. It occurs on the eve of the payment of dividends on shares. It would seem that on the eve of the payment, one can buy shares, receive dividends and sell them right there. Beginner lovers of easy money often fall into this trap.
Dividends are paid to shareholders. The dividend payment is approved at the shareholders meeting, where the corresponding register is formed and the payment date is determined (the so-called cut-off of the shareholder register). Everyone who owns the paper on the morning of the day after the cut-off receives dividends. A dividend gap is a fall in the value of a share by approximately the same amount as the number of dividends since they are paid out of the company’s profit. By the way, opening a short position (since it is known for sure that the share price will fall by the number of dividends) will also fail – this is prohibited, and the broker must force close this position.
Is the drawdown of Gazprom shares a coincidence or is this a dividend gap, I propose to draw our own conclusions. Most likely, several factors were combined here at the same time. But it was July 17, 2018, that was the last day of the purchase of shares with the payment of dividends.
2. Underestimation of other factors
The discount rate and report on the US labor market are considered one of the most influential factors for currency pairs combined with the dollar. As well as the report on oil reserves, gasoline in storage and the number of shale drilling rigs for oil. At first glance, this could build an effective strategy. For example, at the time of the release of positive reporting on the labor market, open a long position lasting about an hour. But this does not always work. Even despite the increase in the number of jobs, it is necessary to analyze data on unemployment, changes in average hourly wages, etc.
I’ll give another example: in the EUR / USD pair, quotes depend not only on US statistics but also on ECB statistics. If the first data was already provided by investors and will coincide with their expectations, and the ECB statistics turn out to be unexpected (inconsistent with forecasts), then the US statistics considered more influential will yield to the ECB statistics in favor of EUR.
How not to fall into the trap:
- Assess everything in a complex, starting from geopolitics and macroeconomic indicators, ending with industry data and statistics of a single company. In the foreign exchange market, evaluate the policies of the Central Bank of all countries and statistics.
- To analyze the state of the industry as a whole.
- Do not rush. If the movement of the rate (price) after the release of statistics for some reason has gone in the opposite direction, it is better to close the position and wait. On December 6, 2013, after the release of a very strong NFP report, the EUR / USD rate fell, but then there was a reversal. According to analysts, such a reaction to a strongly positive report was the first time since 2000. Why is unknown. It is possible that large investors played against the market.
3. Late reaction to the event
Suppose you expect some kind of event: a change in the discount rate or the output of financial statements. You buy (sell) an asset, but… Statistics appear, but the price of the asset does not change and you lose money on margin. Why this happens: the fact is that many events are predictable long before they occur. And more far-sighted traders buy an asset much earlier. Analysts call it this: the price of an asset has not changed since investors have already “won back” this news.
How not to fall into the trap:
- The answer is one: to learn in advance to provide options for the development of events and take into account the two points mentioned above.
4. Media manipulation
Tell me, where would you get information about an event? An economic calendar, primary sources or media, forums, analytical forecasts, expert opinions? Of course, trust in experts and the media is not enough, but when the same information is confirmed in different sources, and even actively discussed in relevant forums, you unwittingly start to believe the majority. Just think logically: if, for example, everyone rushes to buy an asset, then who will sell it at a rising price? Market makers? Or those who specifically created the information space, pushing the potential investor to the appropriate solution?
Here are a few tricks for trading sharks that help hamsters shave:
- Numbers game. Submission of statistics in such a way as to create a certain appearance of the situation, beneficial to the manipulator. Most often it is convenient to influence a person, indicating%. And from what and in comparison with what, few people think.
- Creating fake accounts on forums and creating the appearance of correspondence in order to bring certain ideas to the trading masses.
- A special “stuffing” of knowingly false news, ideas, opinions through “their” analysts.