Trading Fundamentals vs. Trading Method

Everyone wants to learn a method. Everyone wants to learn a system.

“Just tell me what to do – step 1, step 2, step 3.”

If you want to lose weight for example, you can follow a series of weight loss diets:

  • South Beach diet
  • Fat Loss Factor diet
  • Atkins diet
  • Caveman diet
  • Sonoma diet
  • The Kind diet

…and the list goes on. These methods tell you what to do, why, how and when.

What if you’re looking for an exercise program?

You’ll find an endless variety ranging from high-repetition, low-weight workouts to low-repetition, high-weight workouts. Throw in another dimension of workout intensity and the number of choices can be truly mind boggling.

So how would we know which option is appropriate? Because, I’d bet my bottom dollar no one single method will work for everyone.

How can we tell which ones are likely to be effective for us?

In the world of retail Forex trading, a new trading system is literally released every couple of weeks.

So today it’s “Disgruntled Ex-Hedge Fund Trader Spills His Secrets”, and the week before it’s “Scientific Method For Forex Trading” – and these are just some of the more conservative names I’ve come across over the years. (The best ones I’ve heard so far are “Forex Killer” and “Forex Annihilation” – these never cease to make me chuckle.)

What The Method Doesn’t Tell You

Now, it’s not the purpose of this post to poke fun at the vendors of these trading systems (and the people who buy them) – no, this post is about how you’ll never find what you’re looking for, if all you’re looking at are the systems.

You see, although systems are efficient in application, they do absolutely nothing to ensure effectiveness.

Let’s take the weight-loss diet example.

Instead of blindly following every diet plan that comes out, wouldn’t it be smarter to first understand how carbohydrates, fat and calories work in relation to our body?

Because unless you take the time to figure out the fundamentals behind the science of losing weight, you’ll have absolutely no idea if you’re doing the right thing to get the results you’re looking for.

Getting Heavier & Looking Better

Many people want to lose weight to look better. They want to look attractive. And in my opinion, that’s a good thing.

But did you know that you can actually get slimmer while maintaining the same weight?

This is possible because muscles are denser than fat and occupy less space.

(source: http://www.onemorebite-weightloss.com/muscle-to-fat.html)

So if you’re looking have your clothes fit better, or to get slimmer, weight-loss may not even be necessary! In fact, you can actually get heavier and look slimmer.

Now think about this for a moment.

How many people do you think are out there in the world, wanting to lose weight to get slimmer? And how many of them actually realize that they don’t have to?

In this particular case, their measurement for success (i.e. less weight) is not necessarily correlated with the result they want (i.e. get slimmer).

And yet people are spending so much time and effort in trying to lose weight.

It’s a simple (but huge) case of misguided intentions.

Why Fundamentals Trump Systems

A big reason why so many people are struggling with getting the results they’re looking for, is that they don’t bother to learn the fundamentals. They take the short-cut of just buying into a method and following it, hoping that it would get them to where they want to be.

Sometimes, this works out due to pure luck. People sometimes stumble upon the appropriate method for their particular circumstance. They don’t really know how or why the method works for them – only that it does.

For the vast majority of people however, they’ll have to keep trying until they stumble upon a system that works for them (or go broke trying), or give up.

All that’s really needed to address this problem, is to understand the fundamentals.

How I Finally Learned To Swim

For the longest time, I’ve admired others’ ability to swim. I’d sit by the pool with a drink and watch people glide from one end to the other, effortlessly.

But when I tried to swim, I found myself exhausting all my energy with pathetic little progress.

It was only after I learned the fundamentals of hydrodynamics (from Terry Laughlin) that I understood my problem.

You see… before, I was focusing on pushing the water back (as we would while canoeing), but Terry taught me that I should have been focusing on my underwater form, as it is much more effective to decrease hydrodynamic resistance than it is to increase my paddling force.

This is what effective swimming looks like:

It hardly looks like the “drowning chicken” method I’ve been practicing all along.

Fundamentals Before Method

Understanding the fundamentals enables us to select the appropriate method to get the results we want.

Unfortunately, too many traders view fundamentals as “too simplistic” to be effective. The critical mistake they make here is thinking that the fundamentals are a way of trading (i.e. a method).

The Truth Behind Successful Retail Traders

When it comes down to it, the traders that get results don’t just follow one system.

They use the system that’s appropriate for the current market situation. And when that situation changes, they use a different (yet appropriate) system.

But in order to do this, they had to first learn the market fundamentals. It is the understanding of fundamentals that enables them to decide which trading method to apply to the situation.

But Methods Are Sexy & Exciting

Unlike trading methods that come in all sorts of shapes and sizes however, fundamentals are dull and boring…

…which is probably another reason why few traders pay attention to them.

Methods are like fashion that everyone goes through in ‘seasons’.

Right now, automated trading robots are the rage but I suspect it won’t last very long — people are starting to find out it’s just a whole bunch of baloney.

Interestingly enough, the hot topic before expert advisors were, I believe, manual trading systems (that involve various combinations of technical indicators). “No discretion is required, just follow the technical indicators without emotion” was the deal of the day.

And now with expert advisors, not only is judgement not required, you don’t even need to execute the trade – the software will do it all for you!

The deal of the day is now: “just install, leave your computer on and it makes money for you!”

Holy crap. I couldn’t have thought of a better sales pitch myself.

I mean, who wouldn’t want to make money without actually doing anything?

I’ll be completely blunt with you — those who teach trading fundamentals don’t stand a chance against those who sell dreams.

Everybody loves short cuts. No one likes to be told that hard work is required to succeed in the business of trading.

You Can Know A Lot About Something But Not Understand It

Now I need to make a distinction here…

Knowing a lot about trading doesn’t mean that one understands it.

It’s like riding a bicycle.

Jim can learn everything about the physics of motion and the mechanics behind the wheels and bicycle frame — but until he actually gets on one and rides it without falling over, he doesn’t understand what cycling is about.

Trading works in pretty much the same way.

What I’ve just shared with you is one of the (many) fundamentals of trading. And it will never change. No one will really understand what trading is about by reading a book. Videos, books and seminars facilitate the understanding of information, but they do not provide the keys to success in the markets.

Make sure you know the difference between the fundamentals, and systems.

The Takeaway

If you’ve been jumping from trading method to trading method without getting results, consider that you may have been focusing on the wrong thing all along.

Learn, or figure out what’s important (and what’s not), and use that understanding to guide your trading approach.

As long as you stick to the fundamentals, you won’t stray too far from the proper path.

By |2018-10-30T03:48:15+00:00October 30th, 2018|Philosophy|15 Comments

15 Comments

  1. Tony March 27, 2012 at 7:52 am - Reply

    Very interesting thoughts! Learning fundamentals is probably thought a little more difficult to master and often people choose the easy way out.

    • Chris Lee March 27, 2012 at 5:14 pm - Reply

      Hey guys, thanks for the comments – I’m glad you liked this post!

  2. bob March 27, 2012 at 8:37 am - Reply

    Hello Chris,
    Just by reading your blog on methods vs Fundamentals, I have discovered in few minutes, why I am having this yo-yo results. I probably going to take your advice and start from the understanding of the Fundamentals.
    Thanks. Bobil60

  3. philips March 28, 2012 at 6:49 pm - Reply

    Good; strength and weakness are best way to learn. Thanks

  4. Edward N May 10, 2012 at 4:00 pm - Reply

    HI:Thank’s for all the info you give us, the pic’s are very good but make me wondre how big the mosqitos are. All that green must come from a lot of rain. Seems to me one should devise your Method from the Fundamentals?

  5. Berthram October 13, 2015 at 1:48 pm - Reply

    Chris,
    Your blog is a must read for any one who desires to be successful in this our Forex trading business. I quite agree with you that a proper understanding of the financial market trade and trading fundamentals is an unavoidable part to success in this business.
    I also agree that any one who desire to stay successfully long in this business must not follow one system but use systems that are appropriate for the current market situations.
    Finally i believe that there are two types of traders ie dependent and independent traders. We will talk about the two types of traders some other time .

  6. Alex McCullie February 13, 2016 at 1:13 am - Reply

    Chris

    A relevant quote complementing your article

    As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.
    “The Twelve Principles of Efficiency” by Harrington Emerson. 1911

    • Chris Lee February 14, 2016 at 3:07 pm - Reply

      Very well said!

  7. Tony February 14, 2016 at 2:47 am - Reply

    Yes , fundamental is important, however you can also making decent gains in the market with superb technical analysis trading the higher time frame like 8hrly chart. I am not talking about buy and sell indicator system.Understanding how the market waves in an ABCD fashion will give you a leg up as a technical trader.

    • Chris Lee February 14, 2016 at 3:05 pm - Reply

      Hi Tony, are you referring to Elliot waves?

  8. Alex McCullie April 16, 2016 at 10:55 pm - Reply

    Just this morning I was reading a forum on a variety of simple mechanical trading methods. The comments and questions were fascinating. There was almost a sense of desperation on being told whether the author meant X or Y event had to happen to enter or exit the trade. One poster even followed up with “could you amswer my earlier question?”.

    I’m relatively new to forex but I work on the assumption that price movement is relatively unpredictable. Our best hope is using methods that lift the odds slightly in the out favour over many times combined with smart risk management. I don’t want to micro-manage trades. Videos about the mind-sets successful professional gamblers compared to casual punters seem enlightening. Alex

    • Chris Lee April 18, 2016 at 3:53 pm - Reply

      The problem, I think, with mechanical trading methods is that they tend to focus on “what to do” while ignoring the question of “why do it this way?”

      • Alex McCullie April 18, 2016 at 10:14 pm - Reply

        I think a lot of new traders are seeking certainty where there is none. It seems more about probability and playing the odds. Recently I watched a youtube video about the professional gambler mindset compared to the casual (losing) punter (https://youtu.be/jdbrMBFEPnA). A comparison to fx makes gives fascinating ideas for traders.

        I’m a professional software developer with a science degree background (many years ago :)). And I was always amused by people quoting answers to many decimal places when the overall uncertainty was actually very high. The extra decimals made no difference to the likelihood of the actual event occurring. Interesting to ponder.

        Chris, please continue your thought-provoking posts. Alex

        • Chris Lee April 19, 2016 at 10:13 am - Reply

          Hey Alex, thanks for the comment, I appreciate it. Glad you like my posts!

  9. Mthokozisi Buthelezi September 25, 2018 at 4:51 pm - Reply

    Chris, thanks so much for such an informative guide. i wish i was following you all along before being swallowed by the sharks out there. Please send me your forex tools I want to start afresh.

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