lunedì 21 novembre 2011

Incorporate Global Macro Analysis Into Intraday Trading

In the world of investing and finance, people tend to think that if you use fundamental analysis heavily in your trading approach that you must be a long-term position trader.  Fundamental analysis, of course, is the analysis of global macroeconomic data and developments.  Global macro traders then use this big picture fundamental analysis in order to buy assets they believe will appreciate over time, or in order to sell assets they believe will devalue over time.

If you enjoy studying macroeconomics and keeping in touch with global economic and political developments, but do not enjoy holding positions for several weeks and even months, then you may enjoy a specific trading approach called Global Macro Intraday Scalping.  Trading in the foreign exchange market is high risk.  Only trade with money you can afford to lose.

How Price Moves

New traders often get very excited about the new strategies.  They love to experiment with combinations of moving averages, pivot points, Stochastic indicators, etc.  The reality, however, is that indicators are all lagging real-time price movement.  Price never makes a 100 pip movement in the foreign exchange market because price hits a moving average of Fibonacci level!!  Price moves because of changing fundamentals.  Price, in any financial market, is simply a reflection of the market participants’ view of the emerging fundamentals.  That means the real mover of price are fundamentals.

Riding the Wave

Using macroeconomic fundamental analysis in your intraday trading is like riding a wave.  At any given point in time, there are typically 2-3 major macro themes driving the overall multi-day or multi-week trend.  However, these themes can change very easily.  Therefore, it is essential to always stay on  the right side of the market by staying on top of your analysis.

For example, as of October 12, 2011, global markets are in a risk appetite environment.  Over the last several months, risk aversion was ruling the market.  Fears of a Greek default were weighing on investor sentiment heavily.  A few weeks ago, it appeared that European banks were severely undercapitalized in the event of a Greek default.  Small businesses can often apply for a small business loan application, but these large banks would have a hard time tapping extra liquidity.  These fears caused risk assets to fall sharply, and EUR/USD, in particular, fell over 1,000 pips within a few short months.

greek default chart

In the chart above, you can see the intense selling pressure in EUR/USD from a HI of 1.4500 to a low of 1.3110 in the wake of Greek default fears.  But then, at the lows of the move, talk began to grow in the EuroZone that there was going to be a bank recapitalization program initiated in order to shore up bank balance sheets and help protect against a run on the banks or complete bank failures in the event of a Greek default.  Banks need much more than a small business loan application to help shore up their balance sheets!

This recapitalization talk helped remove one of the major reasons the market was selling Euros so heavily over the previous few months.  When the very reason the market was selling Euros was removed from the equation, it, of course, makes it reasonable that the market would now begin to buy Euros in order to revaluate it in the event of a bank recapitalization program.

Fundamentals drive price.  If you are an intraday foreign exchange trader, consider keeping in touch with the pulse of the global economy in order to guide your intraday trading decision.  Trading foreign exchange is high risk, and you should only trade with money you can afford to lose.

Related posts:

Mish’s Global Economic Trend AnalysisForex Market AnalysisRelationships between MarketsForex Trading BlogUFX Bank Online Forex Broker Service: Overview

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