Why Good Trading Is Like a Three-Legged Stool

It may seem like I only ever look at price charts. And that I’m strictly a technical trader.

But I use fundamental analysis too.

In fact, fundamental analysis has helped me become the successful trader I am today.

And it can help you too… if you follow this simple process.

Let me explain…

Like most traders, I started my career with fundamental analysis. Because on the surface, it makes sense.

After all, there should be a clear link between a market’s fundamentals and its price. But what appears to be logical, isn’t always true.

You see, if markets consistently followed the fundamentals, there’d be a lot more successful traders and investors out there.

While fundamentals play an important role in my trading, it’s not what you think…

The Only Way to Trade Markets

There a few key principles to follow if you want to be a successful trader.

First, understand the distinction between fundamental and technical analysis.

Fundamental analysis will tell you where to look, whereas technical analysis will tell you what to do.

Both methods are complementary to one another.

For example, you may want to trade the currency markets, because there’s always something going on. That’s why I love trading currencies.

Over the years, I’ve gained expertise on broad macroeconomic themes like central bank policies, trade relations, and fiscal policy.

But, you don’t have to be an expert on Norway’s government spending platforms, or New Zealand’s agricultural exports to profit off a move from the Norwegian krone or New Zealand dollar.

All you need to know is whether a big move is on the horizon.

If it is, fundamental analysis can help you know where to get into the market and where to get out.

For instance, if the Reserve Bank of New Zealand (New Zealand’s version of the Fed) has a policy statement coming up, you should know it’s likely a market-moving event.

But knowing whether the central bank will raise rates, lower rates, or keep them the same won’t help you make money.

To make money, you need to know what time the policy statement is scheduled for release. This is how fundamental analysis can tell you where to look. Knowing this, you can then start to work on what to do about it.

That’s where technical analysis comes in. It shows whether you can expect a higher or lower currency move in the aftermath of the news event.

You can analyze the price chart to know where to buy or sell, at which level to set a protective stop loss order, and where to reasonably expect to exit for a nice profit.

So, technical analysis tells me what to do.

Finding Your Own Way to Profitability

Think of good trading as a three-legged stool…

Fundamental analysis, technical analysis, and the final part, which we haven’t mentioned yet — strong risk management (we’ll discuss risk management in more detail in another essay). These are the three legs. If you take any one of those legs away, the stool will fall over.

How you use each of those legs is up to you. The way you do it will be different from me… and from most other traders.

See, no two traders are perfectly alike. Jeff Clark trades a little differently from me, and I trade differently from Jeff.

What’s important is to be well-rounded, so you can find your way to profitably trade regardless of what the markets are doing.

Before you place your next trade, think to yourself: Are you using the “three-legged stool” approach?

If not, consider how it could help you increase your profits, reduce your losses, and make trading less stressful overall, thanks to sound risk management.

With the markets moving around as they are right now, this message is more important than ever.

Happy trading,

Imre Gams
Analyst, Market Minute

How do you use fundamental and technical analysis in your own trading?

Let us know your thoughts – and any questions you have – at [email protected].