ForexSpirit

This is the third in a series of posts answering questions asked by Kris, a reader of this blog. [Part 1, Part 2]

Thanks for your reply. I’m a little confused about guaging the fundamentals - what is the time frame for the fundamental outlook? Is it the long term fundamentals (like 5-10 years) or is it like what the monthly sentiment is after a slew of news events? Maybe if you could provide an example or your “routine” (if any) to approaching fundamentals.

Thanks for answering my questions - I really appreciate it. I’m trying to decide whether I should follow through with studying this method, and your answers are helping me decide.

The time frame I use for my fundamental outlook has a time horizon of three to six months. I’m generally trying to gauge what price might do in those next few months. Anything beyond that goes back into pure randomness for me; pure guesswork.

I don’t have a predefined routine for how I approach the fundamentals. Maybe if I was doing this fulltime I’d lock down a more definitive approach, but I seem to keep it pretty lose. I follow a basic set of daily reports (Daily Pfennig, etc, which I’ve previously mentioned in my blog a few times) and weekly news periodicals (The Economist). There’s no real secret to getting to grips with the fundamentals; it’s more a case of just getting into the flow of things. Once you see the same economic data reports cropping up month after month they become familiar and pedestrian. It becomes easier to see the ebb and flow in the strength of the two currencies that make up the pair you’re interested in.

Price can generally be said to be either trending or range bound, so it is possible to say that there is no trend at a particular point in time. It’s important to also keep in mind that time is the other axis when looking at any chart, and so changing the time scale of your chart will make a seemingly strong trend on the one hour chart turn into a range bound market on the daily chart. Any time you look to identify a trend you also need to be aware of what time frame you are looking at.

Using the 4×1 methodology you aim to extract profits from the market when it is going in your favour (trending in your one direction) as well as when it is range bound. If your one direction is generally right, then you only end up losing money during strong corrections.

Obviously when you’re trading on the hard right edge you have to continually question whether the supposed correction is just that or is it the beginning of a trend in the opposite direction. This is where your interpretation of the fundamentals comes into play. Your strength of conviction in how you see the fundamentals overlaid on your one direction will play an important part in how actively you trade and take new positions. For example, if a correction is unfolding and your analysis is still strongly in favour of your one direction then you should have no problems buying the dips. You are effectively on the look out for a base to form, ready to benefit from price resuming its long term trend. On the other hand if you see mixed data and your conviction about your one direction looks in question you might hold back more on your trading activity until either more data makes things clearer or price makes the trend or lack of it evident.

It’s important to remember that any currency pair is made up of two currencies; it’s the relative strength of the two currencies that results in the current price. Both currencies might have strong fundamentals. If so, what you need to determine is which one has the stronger fundies. Which one is stronger relative to the other? It’s generally easier if one currency is strong and the other is weak. Similarly, if both have weak fundies, it comes down to determining the relative difference between the levels of weakness.

When any data release comes out, you try to see how that piece of the jigsaw puzzle affects the strength or weakness of the affected currency. And then try and see if you can read how it will play out in the relative strength/weakness between your two currencies.

It is the relative nature between the two currencies that is key. In the same way that speed is something that can only be measured relative to something else. We generally measure the speed of a car relative to how fast it is moving compared to the Earth. Let’s equate the speed of our car to the strength of currency A. Now let’s introduce another car which is moving parallel to our first car, but at a different speed. I’ll equate this second car to currency B. The way to determine the relative strength between the two currencies A and B is just like determining the speed difference between the two cars.