Many retail traders shun fundamental analysis because its counterpart, technical analysis, is easier to understand, quantify and apply. It’s much easier to add a few indicators to a price chart and wait for a “buy” signal, than it is to ponder the impact of increased inflation in the United States.
Naturally, the consensus among retail traders is that fundamental analysis is something only financial analysts and economists can understand. It’s comforting to watch the technical indicators move (and take trades based on them), than it is to think about abstract ideas like monetary policy. It’s “complicated” stuff, so we’re better off just focusing on technical analysis, right?
Not necessarily. It all depends on the answer to two questions:
1. Is technical analysis alone, enough to get consistent trading profits?
2. Is it difficult (or complicated) to apply fundamental analysis effectively to our trading?
These questions require subjective answers, so I won’t pretend they’ll apply equally to everyone. However, given that retail traders are typically smart and sophisticated individuals, I believe fundamental analysis won’t be difficult for most traders to learn, assuming they realize the need for it in the first place.
There are generally 3 camps in the world of trading. There are the pure technical traders, pure fundamental traders, and traders that use a combination of both approaches.
Technical traders believe that historical market prices can predict (to some extent) future market prices. Fundamental traders on the other hand, trade based on their expectations of economic factors.
It’s a common misunderstanding that these are opposing methods of trading, when they are in fact two completely different methods of trading.
Few traders will dispute the significance of technical analysis, so let’s focus our attention on its counterpart. The first question we should ask is:
Because let’s face it – we’re not going to bother with it unless it gives us some advantage to achieving our trading goals, that technical analysis does not provide.
To understand the answer, let us once again look at this issue from a business perspective.
Remember a time before the popularization of digital cameras, when pictures were taken with analog cameras and rolls of film?
It was a time when Kodak, the first company to produce a camera for consumers was valued at $31 billion. If you were a technical investor looking to invest in this business, the future would have looked bright:
Then in 1997, the first digital megapixel camera was sold to consumers. Kodak ignored the budding digital camera revolution, and decided to stick solely to manufacturing traditional analog cameras.
In the same year, the Kodak share price made a temporary dip. From a technical standpoint, it was nothing much to worry about. The future still looked bright:
Now, a technical trader/investor would have seen this dip as an opportunity to invest in more Kodak shares, since the trend was still up.
From a fundamental perspective however, the entire livelihood of the company was at risk.
Since Kodak had practically no involvement with the growing digital camera market, the company would become obsolete if everyone used digital cameras instead of analog ones.
At this juncture, even a weak fundamental analyst would avoid buying more Kodak shares, and may even consider selling.
Here’s the Kodak stock chart as of 2011:
Now of course, the technical investors would certainly have detected a change of the trend from “up” to “down”, and adjusted their investments accordingly.
However, most would have only confirmed the trend change in late 2000, approximately 3 years after the introduction of the first megapixel digital camera.
In practice, this is the main difference between fundamental and technical analysis.
While technicals are great for picking entry and exit points, fundamentals serve to detect the strength and potential change of underlying trends – they give the trader a context within which to enter and exit trades.
Over the years, I’ve observed that most retail traders belong to the pure technical camp.
Some may think they’re using both fundamental and technical analysis, but a close look at their trading method reveals that while they may pay some attention to economic indicators and news, most do not incorporate a tangible decision-making system based on shifts in the economic landscape.
It’s one thing to acknowledge that fundamental analysis is important; It’s another to have a system where fundamental factors actually play a role in deciding whether to buy or sell, and how much to buy or sell.
Can fundamental analysis really help in making these decisions in a specific, quantifiable way? The answer is yes. I do it all the time.
Now before we continue I’d like to state that despite revealing all this, I fully expect the majority of people reading this to continue avoiding market fundamentals. A simple, straight-forward explanation like this cannot overcome the immense power of laziness, no matter how logical.
And besides, most people prefer to be told what to do (by their technical indicators), instead of making their own decisions.
You see, the one that that fundamental analysis requires, is THINKING.
And the fact is that most retail traders don’t want to – or don’t dare to – make their own choices.
They want a fully indicator-based system where they can simply click BUY or SELL when the indicators flash a signal. To these people, I mean no offence but that’s just naïve. Making money from one of the world’s most lucrative endeavors is a little more complex than watching for a signal to buy or sell.
I released this manifesto knowing it will not be well received by the masses, but there is a small group of you who will see the truth in these words, and will respond accordingly. This is the group that I’m looking to help. You are the ones that stand a respectable chance of achieving your trading goals.
If what I’ve been sharing with you so far makes sense, read on.
With all sorts of misleading advertising on the internet, magazines and newspapers, many new traders come into the market expecting to make a lot of money quickly.
This is a trait easily revealed by their insistence on making perfectly-timed trade entries and exits.
Instead of thinking in probabilities (“what’s the most likely way for me to win?”), they think in definite steps (“I’ll just follow these steps and will make money at the end of it.”)
This is a big reason why they gravitate towards short-term trading. If you believe you can make money by following a series of steps (or indicators), wouldn’t you prefer to do it in as short a time as possible? That’s only natural.
What these traders don’t understand, however, is that trading, like life, is not conquered by a series of specific steps.
It’s naïve to think that if you ace a few exams in college, you’ll be successful in life. More likely, if you hold the right values and surround yourself with positive, successful people, you’ll flow in the right direction.
Trading works in the same way.
Fundamentals align our trades in the right direction, so that our chances of getting a winning trade is not influenced by some arbitrary combination of technical indicators, but by the flow of billions of investment dollars flowing into and out of financial assets around the world.
Once you understand how to get into the right “flow”, the exact timing of trades becomes of secondary importance.
This is not to say that trade entries are not at all important. Well-timed trade entries can make a considerable difference to your bottom line. But it is better to have a poorly-timed entry in the right direction, than a well-timed entry in the wrong one.
The combination of the need for instant gratification (instant wins) and unrealistic expectations leads new traders to over-trade.
If one believes he can make a lot of money quickly by following a few steps, it makes sense to trade with as large a volume as he can. After all, the larger he trades, the more profits he’ll make, right?
Again, this is a natural consequence of misunderstanding the business of trading. There’s a simple mathematical explanation for this, but I won’t get into the specifics here (if you want to learn more about the business of trading, you can check out the course I’ve created just for you, at the end of this page).
Weak traders don’t think in probabilities – that’s why they tend to trade with too large a lot size. They think their fancy indicators can accurately predict the market, and jump in guns blazing. In the end, they’ll either make a killing, or get killed in the process (remember the graph in part 3 of this manifesto).
Experienced traders on the other hand, know the limitations of technical analysis. They keep their heads low and test the market with small, token trades. They know that as long as they get their fundamentals right and don’t commit with trades too large to handle, the market will soon resume its flow and push all the small trades into profit.
Bad traders think small and trade big. Good traders think big and trade small.
If you’re getting this then you should see the value of choosing a trading operation that serves you as many ways as possible. Obviously, there are more advanced strategies and tactics but if you don’t get the basics right then all the advanced stuff won’t do you any good.
The bottom line is that to succeed in the game of trading, you need to take a close look at the rules (both explicit and implicit), understand how the game works, and make choices that benefit you as much as possible.
Nothing else is more important than this.
What I’ve attempted to do in this manifesto is to get you thinking about retail Forex trading differently than you have before. Here’s a quick recap of the 5 Principles behind a successful retail trading strategy:
1. Trades on the longer time frames
2. Does not require constant monitoring
3. Is not the best-performing, nor worst-performing
4. Price is more important than Time
5. Considers fundamental (economic) trends
If you follow these suggestions you’ll be well on your way to consistent trading profits, while reducing your stress and trading hours.
By now, you may realize that your current trading approach needs some tweaking (or in many cases, a complete overhaul).
In any case, don’t wait to make the changes you know you’ll need to be making.
There isn’t much time left.
Just like in any other industry, the best time to get involved is at the beginning, just as it starts to flourish. Stock trading has been around for some 300 years, while retail Forex trading has only gained popularity in the last 10-20 years.
You can be sure that in the next 5 years, retail Forex trading will be significantly different from what it is today.
Given the industry trends of the financial markets that have already matured, and what’s already happening in the retail Forex industry, I can make the following prediction:
This is, of course, a simplistic description, but it sufficiently highlights the important parts.
Just like how the stock and futures markets have evolved over the decades, the spot Forex market is likely to follow suit.
Already in the United States, the availability of leverage is slowly but surely drying up.
In May 2009, available leverage was reduced from 400 times to 100 times.
Then in October 2010, it got further reduced to 50 times.
What this means is that in less than 2 years, the profitability of a retail Forex trader has been cut down by a factor of 8. If you were making $80,000 per year trading, you would now be making only $10,000.
Of course, the authorities believe that these regulations serve to limit the losses of bad traders (which they do, to an extent), but it is not the availability of leverage that wipes traders out – it’s the lack of education and discipline on the trader’s part.
In my view, the only real difference such regulations make is that instead of taking 3 months to wipe out a bad trader’s capital, it may now take 9 months. But the end result is still the same. Bad traders will keep losing until they improve. The availability of leverage has little to do with their losses.
Similar to the effect of diversification, reduced leverage protects losing traders while punishing the winning ones.
Regardless of my opinion, though, the regulations are in place. Bad traders are now less effective in wiping out their accounts, just as good traders are now less effective at making money.
The point here is that the longer you wait to start trading seriously, the less effective you’ll be. And it’s not like you can instantly jump into the market and start pulling big bucks – you’ll need time to build up your account and trading experience before you can start making a decent income from it.
The good news is that you still have time. Retail Forex trading is a young industry, and you still have several advantages working in your favour, but I promise you this opportunity won’t last forever.
I hope these 5 Principles have got you thinking about how you’re approaching the game of retail Forex trading.
If you’re still reading this you probably realize there’s more to it than meets the eye.
The vast majority of retail traders out there will continue visiting the so-called “authority” websites that sing the same tune: “Learn how to use the moving average. Learn Stochastics and MACD. Learn RSI. Stick to the strategy. Have good money management. Set a stop loss. Be disciplined.”
It’s the same old mantra, repeated over and over again…
But guess what? More than 98% of traders still lose money after one year of trading.
Just THINK:
If everyone is following these same guidelines, and more than 98% of them are still losing money…
then maybe…
you should be looking for a different way of trading!!
Don’t get me wrong – I’m glad most traders out there have no idea why they’re losing even when they follow the same old “advice”…
…because it keeps me on the upper levels of the trading food chain.
You see, in trading, the majority ALWAYS loses. Always. There’s no exception.
All right! I hope this manifesto has opened your eyes to what’s really going on in the retail trading industry, and that you’ve picked up a few tips that will change the way you approach your trading.
Thank you for reading, and I’ll speak to you again soon.
P.S. If you haven’t already, check out my blog at: http://www.pipmavens.com/blog/
Chris,
You write “…the consensus among retail traders is that fundamental analysis is something only financial analysts and economists can understand. ”
But, in reality, many of us have come to rely on technical analysis because even Ph.D.s who – presumably – comprehend fundamental analysis, have as many “undestandings” as their number, i.e. they’re all over the place.
Fundamental analysts often remind me of Elliotticians; yes, some of them get it right sometimes but even the better ones are constantly revising their Elliott Wave count so that when they do finally get it right I’m wondering if they’re like a broken watch, which, though broken, is still correct twice a day.
American President Truman once commented that he would really like to find an economist with only one hand because after advising him of their analysis his economic advisors would always add
“… but, on the other hand …”
I don’t mean to imply that I disagree with what you have written to date, only to offer another perspective based on my own frustration with attempting to employ fundamental analysis in my Forex trading; I could just as easily flip a coin and have the same success rate.
Regards,
Jay Hendon
Hi Jay,
That’s a very important point you’ve brought up.
You’re absolutely correct in saying that the fundamental numbers aren’t significant on their own (from a trader’s standpoint).
However, (and this is one of the things I’ll be covering), the trends of these numbers can be very useful.
Just a small hint of what’s to come… 🙂
Everything you have written rings true, but this one about fundamentals particularly resonates with me as I realized the unfortunate truth in that recently. Yes I preferred just to look at charts and ‘let the indicators do the work’. But this is the wrong way, the indicators are just indicators and I myself must do the work . Thanks
H!
Principle No 5 cleared what is hidden for us new traders. Actually I ‘ll like to learn more about Fundamental thing and also aquire your strategy please.
Thanks for everythings important that you always shared / given to me. It’s meaningful to me. Thanks. – my best regards
hello, all interesting stuff but no mention of current market conditions and effects of intervention etc,
after some time spent with groups of traders and many systems i am also heavily biased to price activity and utilise a “bastardised” HIKAKE type candlestick interpretation to determine many facets of trading and very little focus on other elements. not sure what to make of Fundamentals in FX pairs e.g when say for example swissy pegged to euro and weakened. politics in commodeties rigging of p/metals , printing notes etc. spring to mind, but support much of what you say.
kind regards good luck to all
Yes, we are still listening & reading more of your message. Drop / tell us your method of trading in order, to complete your helping us to succeed in this forex business !
I am waiting to see what you have else.
I like your point of view about the futer of forex
Hello Chris,
I want to move forward much your Manifesto
I await your new mail.
Thank you and bravo.
waiting to have a great week.
With much esteem.
Best Regards
Thank you.
Sorry, “my English” but I have to translate with “google translate”
Your new look.
Guido.
Surely YOU make me think LEE !
The Kodak exercise was awesome, I cannot think about of a better example. Great Ideas and writing. I’m so happy 3 years ago when I started, you were one of the first mentors I had. Regards.
good article,really can improve our knowledge of trading forex.TQ very much
Thank you so much Chris, God bless your big heart. I can say with these principles, I am becoming a successful Trader.
Thanks Chris, you have just made me to understand so many things in fx, may God continue to bless you more and more in Jesus Name, i will be expecting your method of trading later today, once again thanks.
chris,
your,principles are opening my eyes.i hope you will eventually reveal your secret sothat we benefit from it.how come are you so free to give out such important information for free.?
Hi!
I used indicators by DailyFX, but because of them I have lost substancial amount of money. Don’t use them no more. They can’t think.
hi, chris
the fundamental can be good ,but that doesnt say that price will go up.
if i sell someone else is buying. so if the news is good you think buy,but the big boss will sell the postition to you and then take it down ,not up. against your position.
or is fundamental,different then news event.
or do i say crap now 😉
mvg,
tom
wannabe trader
A good chef prepares a meal, ftt for everyone to eat,enjoy and benefit from,not just for taste and appearance but the wholesome health ingredients blended in a unique way,a real celebration of what has been created by trial,error and perserverance: tastes great, can I have some more please.
I don’t mind standing at the back of the line.What does this have to do with FX.
Well being at the back of the line shows me where the main trend is headed.
This is good stuff, I have always had a problem with fundamental analysis, I am not sure where to get the appropriate information for the particular intsrument that I am trading and if I do manage to find the info, I am not sure what it is telling me as it relates to the instrument. I look forward to your method.
Very keen to learn more!
Which part of the world are you based in?
Look forward with anticipation!
Hi Carrie,
I’m based in Singapore at the moment.
Chris,
Thank you for sharing some of your Forex knowledge. Your analysis allowed me to to look at forex trading in a whole new perspective.
everything you say makes sense somehow , now show me !
Very good. I have found that technicals on their own have been very woolly. When I started looking at the fundamentals, matters improved markedly. I believe a trader has to be able to implement both, they complement each other.
Waiting ..
Just finished reading your No 5. Its given me a lot to think about which is what you intended. Thank you
hi Chris
i just want to thank u for opening my eyes. your 5 Principles have given me a more understanding about trading. hope to learn more from u and im seriously looking forward to your next email. Thanks, you are a true friend.
Francis
Your principles are eye opening. Do agree all of them you have listed. Keen to learn your techniques.
thanks so much, your manifestoes came at a point i’m taking decision on a time frame you made mention with simple trading strategy to compliment it. BRAVO!!! Looking forward to your nest mail on your strategy.
Hello,
I believe these are your teachings and will always welcome people from humble and above all intelligent.
Thank you.
You’re a great person!
Bravo hundred times. Good!!!
Thank you again.
Guido – Italy
Hi Chris,
I am a complete newbie at the Forex market but i am caught by the way you tell about it and the way you talk about you have to teach yourself to be a good Forex trader.
I am waiting for your email and hope to learn about your trading method!
EXCELLENT, I THINK IF ANY ONE FOLLOW YOUR 5 PRINCIPALS IN FOREX TRADING WILL WIN DEFINITELY
FOR FUNDAMENTAL ANALYSIS : TO UNDERSTAND AND TO GET INTO THE RIGHT FLOW IS MORE IMPORTANT. THINK BIG & TRADE SMALL; MAKE MORE MONEY, MORE OFTEN WITH LESS OFTEN. REALLY THIS IS CALLED GOOD FOREX BUSINESS.
Sir I am still amazed at your simple digestion and analysis of forex trading I cannot but wait for more dispassionate analysis from you .I will continue to stay tuned for more tips
Best regards
Dr Charles Ibenye
Guys, thanks. I hope these principles will serve you well.
Higher time frames seem like the way to trade; looking forward to
hearing more from you; Thanks
Great information, I have been struggling for several years now doing all the wrong things that you have mentioned. I guess I have been helping to feed the 1%
Hi Chris,thank you for your lessons,
Regards,
Helmut
Hi Helmut,
You’re welcome!
as good as the previous ones… clear… right to the point… full of honesty and smart…
My dear Chris, i thank you so much for all these write-ups and i know very deep in my heart that GOD will continue to open ways for you to prosper. I have always believed that technical analysis is just about mastering it. But the truth as i found out now is that , i make a little gain today with a strategy, only to lose more or all my money the next day with the same strategy. I don`t think i will sleep proper until GOD touches your heart to help me with your strategy. I sincerely look forward to getting it.
REMAIN BLESSED,
PIUS.
Hi Pius,
Thanks, I really appreciate your kind words! 🙂
You have pushed the button of curiosty..will be waiting for the next e-mail
Wao….is all i can say,have been truly blessed by the principles of your manifesto and its been an educative experience,Thank so much….i cant wait to see what your trading methodology is like.
Thanks so much and God bless you.
Hi Oluwaseun,
Thank you for the kind words!
Glad to be of service. 🙂
Hi Chris, I am certain that what are teaching is the truth,really hope that I get a chance to see more of exactly you do it I am 62 years old and on my last legs,so trading is the only hope I have for the future so looking forward to next Email, many thanks for all the info so far have gained new hope and that my friend is something you will blessed for
Richard (South Africa)
Chris, Your principles take me 20 year back when I went to US to sutdy MSc in genetics. Everybody said that I was crazy. This is only for smart people. I went there and the results could not be better. I got only 1B, all the rest was A. This is for normal people, but we have to work hard and understand WHY. I am here because I have my goals clear. I want to go to the QYJ point but I won`t quit my job. This thing will only show me that I am in the rigth direction. Money will be the result but not the goal. Thanks Chris for sharing these principles. You take my word, I WILL NOT SHARE WHAT I LEARN WITH YOU. I have being trading for 2 years, and this is the first time that I find someone who sells philosopy, thinking and sincerity, not robots, EMAs, arrows, EAs and all the garbage around this business. Thank you.
You have brought to the fore many thoughts I have always had in the back of my mind. Very interesting and indeed welcoming to read what you say. I am impressed…..
Chris,
You continue to make a lot of sense to me. Its devastating news to me that almost over 90%
of traders lose, virtually putting alll their money into the mouths of mainly the big ‘fish-whales’
So almost all retail lraders are ‘suckers’ and don’t stop losimg, except smart, knowledgeable
people like you?. I am very keen to know your winning strategy and follow it to hopefully break
the cycle of a typical losing trader.and make profit instead!
tanks
I always thought that nobody reads the ‘main information ‘ and loses because of this. But your explanation seems much more likely. I’m one of them and I hope I will not longer be like this.
Thanks Chris
I’m starting to get the big picture. Your insight is like a breath of fresh air and as I am a newbie to trading it is nice to have some balance, like too much info from one circle can corrupt one mind.
Cheers
Dave
Good stuff
thanks so much Chris
I am really grateful that I have been part of the recipients
BRAVO
completely valuable information!
thanks a lot..
Hi Chris,
Retail forex trading is easy because the business is transacted sitting on your own desk without a master breathing down your neck. But as the saying goes ‘ nothing good comes easy’. So hard work, commitment, patience and consistence is required in this biz too. In-depth lessons in forex fundamentals are scanty online probably because most practising professional economists are contented with their paid jobs. I agree totally that understanding the fundamentals would demystify the forex market so that trading is done just like any other buy/sell transaction in commerce.
Thank you so much for the 5-piece manifesto as I await a hint of your trading strategy.
Edmund
Chris,First thanks for ur email covering retail fx manifesto part 5.I highly appreciate ur thinking & principles of fx trading.At this stage I’m totally new to fx. But long TFs require large capital & large S/L.Is it reality?.Fundamentals require no. of different datas, news etc. Can retail trader access it or grasp it?It is long run procedure to have economic knowledge. On other hand TA also fails @ spike movements. Then how retail trader can manage inbetween .How can retailars identify economic trends with charts & price action. How retailer can use economic news & its impact.L.onger TFs are safe &consistent .But retailers are packed as above.If ur training rushes thr’ these,a sincere,enthusiastic ,willing to be pro definitety accept u.Plz reply alongwith training details.
Hi Uttam,
There is a common misunderstanding that “long TFs require large capital”. I’ve written a blog post about it here, so check it out.
I can’t wait….
Thanks Chris, this is excellent….I’m across fundamentals every day with the nature of my work, and as a result keep an eye on Bloomberg currency reports alongside a few tech indicators. But up until reading your articles I’ve relied more on indicators due to forex influences that you mention.
Q. Technicals are sometimes moving in a winning direction prior to an announcement on the strength of economic previews… (Bernanke’s Congress speech for example moving towards more quantitative easing because of reported fudged employment figures..)..?? Then the technical…candles up against trend lines…?? Your approach is speaking volumes.
Blessings, Mike
Chris, I’m sitting on the edge of my seat!! I haven’t been this exited since when I first seen my beautiful wife. I can say this because she don’t Internet I think. Lets make money!! go go go Chris
Hi Chris,
thankyou for your manifesto which was received with high regard I have been waiting for someone with your insight for a long time compared with all the get rich quick sales of robots on the net. I feel confident in your presentation which makes a lot of sense. looking forward to your next e mail
Thanks..for this so far:-)
Thanks a lot Chris for helping us in furthering our forex education.
You are indeed a great mentor to behold. Remain BLESSED!!!
Very educative & enlightening Chris.I look forward to your strtegy
thanks for the tips, well worth the stop over.
thankyou,good article on improving forex trading
THANK YOU CHRIS. Not many people today are willing to give out the information you are giving us.I know this is going to change the way I trade.I have been trading in the forex market for almost a year now. Started with a $10,000.00 demo account and still have $9,500.00 after 205 trades . I win some I lose some so what is what I was taught. I have had some winning streaks and some losing streaks. I have been trading mostly the 15 min time frame. After reading your manifesto, that is going to change really quickly. THANK YOU again.
GOOD THING TO DRAG OTHERS INTO THE SMALL GROUP OF THE WINING TRADERS. YOU’LL BE BLESSED FOR IT, SURELY. THANK YOU.