In my time trying to understand the thinking of the retail trader, I have come to realize that the majority of them rely on technical analysis to base their trades off of. On the other hand, when I study successful traders they might use technical analysis, but also have a general bias in regard to their fundamental view of the situation. When Stanley Druckenmiller broke the BoE he correctly anticipated the BoE would not defend the pound. So, would a retail trader be better served to try to understand the fundamentals or at least pay attention to how the market fades a piece of important news instead of all the technical systems being peddled today?
- My views on this topic are very simple:
- Understand the basics of technical analysis. You don’t need to be a quant-geek to be successful, but understanding the first ten chapters or so of the classic Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy would be a great start.
- Understand the basics of fundamental analysis. Pay attention to trends in interest rates, commodity prices, prevailing direction of investment flows, among other. When the fundamental and technical outlooks for a currency differ, always side with the techs.
- When the fundamental and technical outlooks for a currency converge, go for it! Take a more aggressive position than normal.