Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

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c02 JWBK195-Saettele May 31, 2008 11:19 Printer: Yet to come

CHAPTER 2

The Problem

with

Fundamental

Analysis

T

wo forms dominate analysis and trading: fundamental and technical.

The two methods of analysis have led to a philosophical divide among

analysts, traders, and the entire financial community. I have problems

with both methods in the traditional sense, but especially “fundamental”

analysis. The traditional fundamental approach is backward looking, which

is great for attempting to explain why something did happen but worthless

if attempting to forecast what could happen.

In the FX market, fundamental analysis refers to analysis of a coun-

try’s economic conditions. This includes macroeconomic indicators such

as growth rates, interest rates and monetary policy, inflation, and unem-

ployment. The fundamental analyst and/or trader believes that he or she

can analyze these macroeconomic indicators, arrive at a bullish or bear-

ish bias regarding the currency in question, and trade accordingly. Remi-

niscences of a Stock Operator sums up the effectiveness of trading based

strictly on news events (economic indicators are considered news events).

The main character, Larry Livingston, remarks that “the trend has been

established before the news is published, and in all bull markets bear

items are ignored and bull news items exaggerated; and vice versa.”

1

This

was true in 1923 ...