🎓 EDU 4 of 20: A PROFESSIONAL TRADING APPROACH (FIST)
Hi traders, wish you a happy and prosperous New Year.
In the last EDU post, we touched on the main factors that move currencies in the short, medium, and long run. Professional traders follow these influences to determine what currencies to buy and sell.
However, each trader has its own time horizon, so following long-term market determinants if you want to hold your trade for a few hours doesn’t make much sense. In fact, it’s counterproductive. Currencies can move in the opposite direction of their Purchasing Power Parity (PPP) rate, or Terms of Trade (ToT) for months and even years.
While these models work well to provide us with a possible market direction in the long-term, their short-term track-record is rather poor.
At CommaFX, we hold our trades mostly intraday or for a few days, and close them ahead of the Weekend (if a trade is still open on Friday.) This way, we can make more short-term trades and avoid the market risk of holding trades over the weekend. News that are releases over the weekend can have a significant impact on open trades after the markets open on Monday!
I am following the FIST approach, which is a global macro approach that allows us to take only high-probability trades. FIST stands for Fundamentals, Intermarket, Sentiment, and Technicals.
On the Fundamental side, I am following:
1. The current business cycle of a country through leading economic indicators such as housing starts, durable goods orders, and PMIs. Countries that are in the expansionary phase of the business cycle see their currencies strengthen, while countries that are in the recessionary phase usually see their currencies weaken over time.
2. Important news and themes: Such as Brexit, US stimulus, OPEC meetings, Central Bank commentaries...
3. Economic Indicators used by central banks to adjust their monetary policy: inflation rates, labor market indicators, economic growth.
On the Intermarket side, I am following the performance of other markets and asset classes that can have an impact on the FX market, such as:
1. Commodities: For commodity currencies like CAD (oil), INR (oil), AUD (copper, gold), NZD (dairy).
2. Stocks: The performance of the stock market can provide clues for future exchange rates (e.g. higher Nikkei 225 usually leads to JPY weakness).
3. Bonds and yields: Global capital chases the highest yield. When bond prices fall and yields rise in a country, the country’s currency will often strengthen.
If I see a strong divergence in the Intermarket (for example oil rises but the Canadian dollar falls, such as the case in the previous week), it gets our attention. I become bearish on the CAD from an Intermarket perspective.
On the Sentiment side, I am following risk appetite indicators and market sentiment as shown by the options and futures markets. What I pay attention to is:
1. The performance of risky assets vs safe-havens: stocks (risky), risk-currencies (AUD, NZD), oil (market optimism), metals (silver, copper) vs safe-havens such as gold, bonds, JPY and CHF. When risk sentiment is positive (risky assets are bought and safe-havens sold), I become bullish on stocks, AUD and NZD, and bearish on the JPY, CHF, and USD, for example.
2. Market positioning: I follow the positioning of fast money (hedge funds) and smart money as shown by the Commitment of Traders report. When the big guys become bullish on a currency and increase their bullish bias week over week, I become bullish as well.
3. Options put/call ratio: The put/call ratio shows how many put and call contracts are active for a currency. As the ratio rises (i.e. more puts than calls), this is usually a bearish sign for a currency, and vice-versa.
Finally, once I see a promising trading opportunity in the market after performing my Fundamental, Intermarket, and Sentiment analysis (matching strong vs weak currencies), it’s time to identify possible entry and exit points with the use of Technicals.
Bear in mind that I know what direction I want to trade (i.e. short USD/CAD) before even opening a price-chart! The chart is only used to find suitable levels for a selling position.
On the technical side, I focus on important retracement levels, volume profile, and price-action. I don’t trade breakouts, but wait for the market to come to my level (using LIMIT orders) to enter into a trade with an attractive reward-to-risk ratio.
This was a short introduction to how professional traders find trading candidates in the market. Unlike the usual retail trader who focuses only on charts, we know what we want to trade before even opening the chart!
A chart is the last thing I pay attention to, and my technical analysis takes me around 5 minutes to find where I want to enter into a trade. 90% of the time, I am only focused on fundamentals, intermarket, and sentiment.
If you found this post useful, please hit the “LIKE” button and follow. Also, I’ll try to respond to all questions you might have, just post them in the comment section below.
Stay tuned for the next part of our Educational Series! In total, there will be 20 posts that will CHANGE the way you trade and look at the markets – PROMISED!
In the last EDU post, we touched on the main factors that move currencies in the short, medium, and long run. Professional traders follow these influences to determine what currencies to buy and sell.
However, each trader has its own time horizon, so following long-term market determinants if you want to hold your trade for a few hours doesn’t make much sense. In fact, it’s counterproductive. Currencies can move in the opposite direction of their Purchasing Power Parity (PPP) rate, or Terms of Trade (ToT) for months and even years.
While these models work well to provide us with a possible market direction in the long-term, their short-term track-record is rather poor.
At CommaFX, we hold our trades mostly intraday or for a few days, and close them ahead of the Weekend (if a trade is still open on Friday.) This way, we can make more short-term trades and avoid the market risk of holding trades over the weekend. News that are releases over the weekend can have a significant impact on open trades after the markets open on Monday!
I am following the FIST approach, which is a global macro approach that allows us to take only high-probability trades. FIST stands for Fundamentals, Intermarket, Sentiment, and Technicals.
On the Fundamental side, I am following:
1. The current business cycle of a country through leading economic indicators such as housing starts, durable goods orders, and PMIs. Countries that are in the expansionary phase of the business cycle see their currencies strengthen, while countries that are in the recessionary phase usually see their currencies weaken over time.
2. Important news and themes: Such as Brexit, US stimulus, OPEC meetings, Central Bank commentaries...
3. Economic Indicators used by central banks to adjust their monetary policy: inflation rates, labor market indicators, economic growth.
On the Intermarket side, I am following the performance of other markets and asset classes that can have an impact on the FX market, such as:
1. Commodities: For commodity currencies like CAD (oil), INR (oil), AUD (copper, gold), NZD (dairy).
2. Stocks: The performance of the stock market can provide clues for future exchange rates (e.g. higher Nikkei 225 usually leads to JPY weakness).
3. Bonds and yields: Global capital chases the highest yield. When bond prices fall and yields rise in a country, the country’s currency will often strengthen.
If I see a strong divergence in the Intermarket (for example oil rises but the Canadian dollar falls, such as the case in the previous week), it gets our attention. I become bearish on the CAD from an Intermarket perspective.
On the Sentiment side, I am following risk appetite indicators and market sentiment as shown by the options and futures markets. What I pay attention to is:
1. The performance of risky assets vs safe-havens: stocks (risky), risk-currencies (AUD, NZD), oil (market optimism), metals (silver, copper) vs safe-havens such as gold, bonds, JPY and CHF. When risk sentiment is positive (risky assets are bought and safe-havens sold), I become bullish on stocks, AUD and NZD, and bearish on the JPY, CHF, and USD, for example.
2. Market positioning: I follow the positioning of fast money (hedge funds) and smart money as shown by the Commitment of Traders report. When the big guys become bullish on a currency and increase their bullish bias week over week, I become bullish as well.
3. Options put/call ratio: The put/call ratio shows how many put and call contracts are active for a currency. As the ratio rises (i.e. more puts than calls), this is usually a bearish sign for a currency, and vice-versa.
Finally, once I see a promising trading opportunity in the market after performing my Fundamental, Intermarket, and Sentiment analysis (matching strong vs weak currencies), it’s time to identify possible entry and exit points with the use of Technicals.
Bear in mind that I know what direction I want to trade (i.e. short USD/CAD) before even opening a price-chart! The chart is only used to find suitable levels for a selling position.
On the technical side, I focus on important retracement levels, volume profile, and price-action. I don’t trade breakouts, but wait for the market to come to my level (using LIMIT orders) to enter into a trade with an attractive reward-to-risk ratio.
This was a short introduction to how professional traders find trading candidates in the market. Unlike the usual retail trader who focuses only on charts, we know what we want to trade before even opening the chart!
A chart is the last thing I pay attention to, and my technical analysis takes me around 5 minutes to find where I want to enter into a trade. 90% of the time, I am only focused on fundamentals, intermarket, and sentiment.
If you found this post useful, please hit the “LIKE” button and follow. Also, I’ll try to respond to all questions you might have, just post them in the comment section below.
Stay tuned for the next part of our Educational Series! In total, there will be 20 posts that will CHANGE the way you trade and look at the markets – PROMISED!
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