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The Most Important Technical Indicator is… Fundamentals
I am a technical trader. I trade price on the 1-minute chart, which is about as granular as you can get without becoming a high-frequency scalper. I couldn’t care less about Fibonacci levels, Gann angles, Elliott waves and any other geometric structures that traders try to graft onto what is essentially a never-ending price auction. If those tools work for you -- all the more power to you -- but I like to operate in the here and now, where my sense of the future is never more than an hour long.
I have a great new algo, called Trendy that we developed in my chat room and I am very happy to follow its signals. But Trendy, like all robots it is just an execution algorithm. Like a hunting dog, it can follow a scent but it can’t tell you if that scent will lead you to a dirty old sock or a murder weapon. Like all algos it needs to be turned on and off. It needs to be properly positioned. It needs to be … managed.
Just for fun, I let it run 24/5 on a demo account and watch it bleed money hour by hour, while I collect 20-30 pips most every day judiciously deploying five to ten times each day.
But much as I believe in the tactical value of trading price, the other day I realized that the single most important input into Trendy’s success is actually … fundamentals. Today, for example, the market gave me three good Trendy trades -- a short AUDUSD off a meh RBA interest rate statement, a long USDJPY off the burst in US yields and a short GBPUSD off Jamie Dimon’s letter about the perils of Brexit. All else was garbage, as prices weaved and bobbed and dropped and chopped producing lots of heat but little light as they say the American South.
Technical analysis tells us what IS happening. Fundamentals tell us WHY something is happening. Understanding the WHY gives us the confidence to predict that the price action in the near future. Especially if we’ve seen that pattern of behavior hundreds of times before.
Does it work all the time?
Of course not.
Another story could come by and bump our analysis out of the way. Or some large, non-price sensitive order could disrupt market flow completely and stop us out. However, on balance, this approach works 70% to 80% of the time with reasonable risk-reward ratios. That’s because instead of segregating technicals and fundamentals into two disparate disciplines, this methodology tries to synthesize the two and treats them as two sides of the same coin.
To make a successful day trade you need two things -- the price action to be moving your way and news flow to continue pushing prices it in that direction. Trading, after all, is very simple. It’s the act of predicting that price will either continue or reverse.
So instead of having never ending debates as to which method works, isn’t it better to always be aware of both technicals and fundamentals at any given moment in time so that we put the odds in our favor and make more accurate trades?