Forex Trading Tips: Context is Everything

Context is Everything

For a guy who wrote a book on technical analysis, I happen to be one of its biggest skeptics. In fact one of my favorite chapters in my own book is called Pattern and Anti Patterns in which I meticulously destroy most of the scared myths about double tops, triangles and head shoulders formations by showing how one pattern can quickly morph into another completely changing the nature of the price analysis to follow.

Yet as someone who absorbs every tidbit of the global economic calendar and all the daily chatter from the world’s leading politicians and monetary authorities, I am keenly aware of the considerable shortcomings of trading off the news. As I show in this week’s YouTube video you should never get caught on the wrong side of that old Richard Pryor skit of “who you gonna trust me –or your lying eyes?” A good trader should always trust his eyes and respect the price action no the matter how difficult or ridiculous it may seem at the time.

--------------Top 5 Stories in FX This Week----------------
Dow 10,000
Will US Repeat Mistakes of 1937?
A 'Framework' For More Government
The Growing Debt Bomb
The Consumer Spending Myth

Those traders who don’t acknowledge the intrinsic nature of luck in the game will never develop the emotional strength to survive its many ups and downs. We see this regularly with our subscribers. The fair weather fans who join BK for a month or so, inevitably leave disappointed the moment we hit one or two losers in row. The ones who join us for a quarter generally have a more positive experience and those who have been with us for a year or more see their trading accounts inexorably grow larger over time.

Markets are littered with carcasses of traders who thought they knew better. For every stubborn fundamentalist like Bill Miller of Legg Mason who kept buying Fannie Mae into its near bankruptcy there is an equally stubborn technician like Robert Prechter who managed to stay short equities through the greatest bull market in the history of the United States because he misread the proper count of the Elliot Wave.

The truth is that neither fundamentals nor technicals alone will ever make you a successful speculator. Most retail FX traders shun news analysis altogether, preferring the false, mathematical comfort of indicators only to be driven into poverty by the seemingly random vagaries of the market. Ultimately some finally realize that all indicators are perfect at predicting the past but can be woeful at anticipating the future.

Conversely the few traders who try their hand at economic analysis will often remain true to their thesis as the market stubbornly depletes their net worth. The irony of the matter is that frequently fundamentalists are right but simply too early. By the time the markets concur with their prognostications the fundamentalists have run out of capital.

In trading context is everything. Today, the yen remains a miserable low yield currency of an economy that continues to convulse, a population that is rapidly aging, and a country whose debt load will soon become utterly unserviceable. But in today’s world where US rates are lower than even those of Japan, the yen is king to the dollar. After a decade of near synchronous alignment with risk flows, the price action in USD/JPY suddenly changed while the fundamentals really had not. Miss that little insight and you miss the whole trade. Yet many seasoned traders were burned exactly in this manner as their long USD/JPY positions collapsed even as equities continued to rally.

That’s why successful speculation is so difficult. It’s not enough to know the calendar. It’s not enough to know the charts. You must understand both just to play the game.

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