Trading with Fundamental Analysis

[MrGecko]

OK, not really sure how to start this off, so I'll begin with a few points:

* most people here use near on 100% technical analysis
* this technical analysis varies from sublime to the ridiculous
* there is a technical reason to go long AND short anything

Now, a few points about fundamental / macroeconomic analysis

* generally carries more credence than technical analysis
* you can argue most things in economics...
* ...as such, there is usually a case for both bulls and bears

So, lets say I am a sell-side analyst and my boss says "put out a research note that's bullish on the Euro over next week- make it on a technical basis". I can do this with my eyes closed. If he says "put out a research note that's bearish on the Euro over next week - make it on a technical basis", again I can do this with my eyes closed.

What if he were to say "do it on a fundamental basis"..??

How far do you need to go to build a fundamental trade??

 

[Martinghoul]

I would need to think and to convince myself that I agree with the reasoning. In general, you can go as far or as near as you like.

 

[arabianights]

Well if you're a sell side analyst, you just use opinions disguised as fact. Best technique is the shifting goalposts... eg:

E.G. Short Euro because Eurozone economies are relatively weak.
Buy Euro because Eurozone economies are relatively strong.

 

[donaldduke]

Not ever thought about this much before but the issue with trading with pure FA i see is where do you put your stop order?

Your FA might get you to go long, but the market continues to go down, the fundamental reason for your trade does not change so you stay in, but the market doesnt really care about your analysis.

I suppose you could use a time based stop or a fixed number like if the market moves 10% against then get out.

If i were using FA for a trade idea i would probably want to use TA to calculate my stop loss point, and maybe even to fine tune the entry point as well.

 

[arabianights]

You only need a stop when there's leverage

 

[barjon]

What if he were to say "do it on a fundamental basis"..??

MrG

Well you could do your short or long note with your eyes closed too couldn't you?

Does it matter? Whatever you use to get in, it's the getting out that makes your money.

jon

 

[donaldduke]

You only need a stop when there's leverage

You also restriced to going long only then. I suppose you could keep meeting the margin calls on a runaway short position.

 

[DionysusToast]

MrG

Well you could do your short or long note with your eyes closed too couldn't you?

Does it matter? Whatever you use to get in, it's the getting out that makes your money.

jon

Not true - if you always get in at the wrong time - you always lose.

The criteria by which you enter is the most important part IMO.

 

[Martinghoul]

Not ever thought about this much before but the issue with trading with pure FA i see is where do you put your stop order?

You put a stop at either a) a fixed loss; or b) where you reach a conclusion that your original premise for entering the trade was wrong.

While it may sound somewhat arbitrary, it's certainly not more arbitrary than drawing random lines on a chart.

 

[barjon]

...Not true - if you always get in at the wrong time - you always lose....

toasty

well, that's not entirely true either .

a good entry doesn't bring you profit, it's your exit that does that.

jon

 

[MrGecko]

While it may sound somewhat arbitrary, it's certainly not more arbitrary than drawing random lines on a chart.

This is sort of my point... if we all agree (for sake of argument) that technical analysis is akin to throwing darts at a board (i.e. no "edge"), can you create an "edge" by ignoring technical analysis and just putting trades on fundamental information?

My knee jerk answer to this question is "yep, course you can", and the natural follow up question is "how much information do you need"?

For example (and why I raised the thread), last week I was trawling through my usual basket of websites/newswires/blogs etc, and arrived at the view that the Eur would tick slowly higher until something happened in peripheral europe, at which point the eur would sell off. This, alas, is what seems to have happened on the first day back.

Do you think this is a legitimate strategy to trade with? The reason I ask is because my pool of "fundamental resources" extends to a DJ newswire and what is freely available on the internet. Can you have a legitimate, short term fundamental/sentiment based trading strategy with resources like these?

There is at least a semblence of "rational" thinking behind each trade, and as Martinghoul says, if not it is just as arbitrary as random lines on a graph.

thoughts?

 

[robster970]

Do you think this is a legitimate strategy to trade with?

Yes - it's legitimate to say that you believe a security is fundamentally under or overvalued and if it is then you are essentially value trading.

 

[MrGecko]

Yes - it's legitimate to say that you believe a security is fundamentally under or overvalued and if it is then you are essentially value trading.

Agreed, but that's not what I had in mind.. replace "fundamental" with "sentiment +/- newsflow".

 

[robster970]

Agreed, but that's not what I had in mind.. replace "fundamental" with "sentiment +/- newsflow".

I think you trade like I do. It's not fundamental per se but it is using economic information/news/sentiment to guage whether something is currently perceived to be mispriced.

I then use PA to decide when to get in/out after I've decided what to do. Works for me.

 

[scose-no-doubt]

We all know I'm no expert but I don't see why not Mr Gecko. Obv the big players get the information beforehand but we're talking probably a matter of minutes. You'd know better than me how the big boys have to re-adjust their positions in an event driven market so if you know that you'd know how to play the move, no? I think that George Soros's reflexivity theory I've been gandering at lately would probably compliment your view.

 

[Martinghoul]

For example (and why I raised the thread), last week I was trawling through my usual basket of websites/newswires/blogs etc, and arrived at the view that the Eur would tick slowly higher until something happened in peripheral europe, at which point the eur would sell off. This, alas, is what seems to have happened on the first day back.

Do you think this is a legitimate strategy to trade with? The reason I ask is because my pool of "fundamental resources" extends to a DJ newswire and what is freely available on the internet. Can you have a legitimate, short term fundamental/sentiment based trading strategy with resources like these?

There is at least a semblence of "rational" thinking behind each trade, and as Martinghoul says, if not it is just as arbitrary as random lines on a graph.

thoughts?

Yes, this is most definitely a legitimate strategy to trade with... People who made a killing shorting Greece late last year (supposedly a few London HFs) didn't do that because of how the price looks on a chart, to give a relatively recent obvious example.

The problem is that bottom-up economic analysis is hard, painstaking work, which very few people are willing to do and even fewer people are truly good at. It's certainly a lot harder than drawing random squiggly lines on a chart. Economists get paid good money to make forecasts (including high-frequency ones), which then are used to make trading decisions.

 

[MrGecko]

I don't think I've made myself as clear as I could have.

I'm not really talking about trading by valuations or bottom up analysis. I don't have the capital (informational, intellectual or financial) to trade like that. What I mean is guaging the sentiment from the various resources that are available to me, and then trading when something happens that reinforces the sentiment.

So, for example, presently the strategy would be "sell eur/usd or buy bunds when something bad comes out about PIGS et al". I guess I would hold the position until I felt that the sentiment had changed, my stop gets taken out, or a new flavour of the month emerges and switch to trading that.

Some people must trade this way, but is the information barrier to entry too high for a retailer?

 

[arabianights]

No, I shouldn't have thought so. So long as you can afford a subscription to the FT that should be good enough.

And loads trade like that.

 

[MrGecko]

lets try it: short EUR 1.2707 on the back of intra-EU tensions re: slovakia

stop @ 3 * ATR(30) on 4hr chart

 

[scose-no-doubt]

stop @ 3 * ATR(30) on 4hr chart

If this works I hate you.

Edit: Don't you think you might have missed the bus on this one?