Combining fundamental and technical analysis

It is more important to know when to enter and exit the markets, rather than just understand why the markets went up or down.

Analysis Chart
Source: Bloomberg

As traders, there is a need to be proficient at knowing what is happening in the markets, as well as understand how news releases can move the charts. Often, I find traders too focused on trying to make sense of what fundamental news move the markets and tend to jump on the bandwagon only when it’s too late.

The market is sentiment driven, there are correlations between currencies, economic figures, equities and commodities. Markets are very dynamic and changing all the time, therefore traders could get confused when they behave abnormally.

In Economics 101, we all know that when a central bank raise rates, more often than not, the currency will rise. However, if market participants think that a rate hike is below what they expect, the currency might actually fall instead. Remember the NZD/USD rate decision in July? The Reserve Bank of New Zealand (RBNZ) hiked rates to 3.5%, and the NZD/USD fell by nearly 100pips as a result.

Another example more recently, the USD actually strengthened, even after this month’s (September) substantially weaker Non-Farm Payroll (NFP) figures. The reaction to NFP is a stark difference, compared to previous months where the USD actually weakened even after weaker NFP numbers were printed. This is all due to different level of market expectations and sentiment.

What’s the best way to gauge the reaction of traders due to specific news? How can we avoid being caught on the wrong side of a trade when the market reacts unexpectedly from news releases? 

That’s where technical analysis comes in. Support and resistance might seem like a very basic concept, and most traders would have come across it in the beginning of their trading journey, but I just want to emphasise more on how important these levels are. Traders who understand support and resistance will be able to tell which levels to stay away from, where the buyers and sellers are and whether the news is significant enough to make an impact on the markets.

To illustrate my point, let’s take a look at the AUD/USD for the week. If you look at the weekly chart below, you can see multiple tops forming near the 0.94/0.9450 levels. This shows signs that there are insufficient bullish momentums to break the resistance.

AUD/USD chart
Click to enlarge

We now look at the daily chart below and we can see a key support level of around 0.92 that was broken on the 10 of September. This is an indication that the trend has changed to a downside and is bearish as a new lower-low is made.

AUD/USD chart
Click to enlarge

Now, this is where it gets tricky. Taking a closer look at the H4 chart, Australia’s Unemployment news was released on the 11th of September and a better-than-expected figure was printed, causing the AUD/USD to rally from 0.9120 to 0.9200.

This is where traders, who understand technical analysis, support and resistance levels well, are aware that 0.9200 was a key support and it was broken on the previous day, which might become a new level of resistance.

Therefore, even if positive news was released, and our bias was bullish, we should be mindful that the 0.92 level is a strong level of resistance. We should then wait and see if price action is able to break the resistance before planning a long position.

If we simply trade based on news and bought the AUD/USD at the 0.92 level, we are buying straight into resistance, which might not be the wisest decision.

 True enough, just a couple of hours after the news, the overall bearish trend on the charts overcame the positive unemployment news and price tumbled even further.

AUD/USD chart
Click to enlarge

In these few months, there were many economic and geopolitical events hogging the headlines. ECB rate cuts, Russia-Ukraine conflict, Scotland’s referendum etc. All these are key fundamental drivers of the market which traders need to be aware of. As traders even if we only specifically trade based on the news, we must still be very mindful of the technical analysis side of things.

Always remember that if we are bullish, we look to buy at the support level. If we are bearish then we look to sell at the resistance level.

Do not trade blindly into a news release and always enter a trade that gives us the highest probability of success.

Here are a few steps for trading around news releases.

  1. Establish the key support and resistance levels on the charts. Remember, the higher the timeframe, the more respected the levels are. I would suggest the daily chart and note that support and resistance levels are not a specific price but a zone.
  2. Analyse the news release and the impact to the market. As mentioned earlier in the article, correlation between markets is dynamic and could change time to time, thus try to have a flexible mind set.
  3. Always trust the charts to determine market reaction, not what you think or perceive.

    Depending out what  timeframe you are trading on, assess the strength and weakness of the reaction to the news by studying
  • Key swings and support and resistance levels, broken and respected.
    - If the news is bullish to the market but is unable to break a key resistance, it shows that the bears might still be in charge.
    - If the news is bearish to the market but is unable to break a key support, it shows that the bulls might still be in charge.
  • Bullish and bearish candle stick patterns
  1. Always plan ahead before a news release. Avoid the urge to jump in on a big move without knowing what lies ahead.

 

 

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