Jarratt Davis has an interesting story: he started as a Forex retail trader after accidentally stumbling upon trading, like most retail traders do, back in 2005 when he saw and forex trading advert on a currency conversion website he visited before traveling.
He started demo trading and was instantly hooked. In the beginning, his forex trading went through the classic vicious cycle of searching, backtesting and jumping between different indicators/systems, looking for the magic indicator/system that would yield a consistent and profitable trading performance.
It was first when Jarrat Davis was introduced to a professional trader at an investment bank that he was able to break free of this classic retail trader cycle. In Jarret’s case, it was the introduction of fundamental analysis that gave him the tools and consistency he was looking for in his trading. What helps traders to ultimately leave the vicious cycle of ‘system hoping’ is very different and personal, but in the end, it all comes down to good risk management and consistency in the trader’s mindset + trading process.
Once Jarret started trading with a consistent approach he slowly began making money consistently and after a steady period of consistent returns he decided to start selling trading signals online for other traders to follow, but he realized that he could scale his business more effectively by trading clients’ accounts directly, so he started a professional asset management business.
Soon after that got headhunted by a small startup hedge-fund whilst also being involved in training and educating traders via his website.
Having said that, Jarrett Davis utilizes fundamental analysis and has previously, in a video on his website said that retail traders are losing money in the forex market because of technical analysis.
That’s a pretty inaccurate statement in my opinion. Most retail traders lose because of a combination of poor risk management and get-rich-quick mentality that makes them regard Forex as some magic land where normal rules don’t apply which leads to a very inconsistent approach and trading process.
Jarratt Davis states that central banks’ rate decisions are the most important factor in the movement of currencies. Generally, that’s true, at least in the medium and long-term. But even then you have cases like 2008 when the ECB was tightening and the Fed was easing its monetary policy and despite that, the EUR/USD fell through the floor from 1.60 to 1.24 within just 3 months. Why? Because another major factor, the financial crisis and subsequent forced deleveraging took precedence over the central banks’ plans.
Another example, during the FED tightening cycle between 2004-2006, the dollar fell hard in 2004 because of concerns about a swelling budget and trade deficit. Or was it because of the global recovery and the roaring bull market in commodities? Who knows. The fact that USD rose in 2005 despite the 2 and a half years of FED tightening was due to a temporary tax law that encouraged US multinationals to repatriate profits that year.
The key takeaway from the above is that there is always a multitude of factors that ultimately drive the currency markets. And the lower the time frame, the less relevance central banks have and the murkier the explanations after the fact get.
This is where technical analysis, price action, and order flow come into the picture. Think about it. Every bit of financial news and information has to be interpreted by millions of market participants across the globe and those interpretations may vary greatly.
Each interpretation of these news events and information has to ultimately be translated into a buy or sell order in the market which shows up on the charts as price movement and price action structures that effectively can predict the current imbalance in order flow, which in turn can lay the foundation for high probability trades.
Following the news and trying to guess how they’re going to influence the rate decisions and how investors/traders around the globe react to them might be a valid trading strategy that works for Jarratt and his students, but saying that watching the fundamentals is the only way to trade, that this is how institutions and professionals do it, and if you’re different you’ll lose money, is false in my opinion.
For instance, CTAs are professional money managers that collectively have billions in assets under management. One of the best known among them is Jerry Parker, a former ’turtle’ under Richard Dennis. He’s been managing money since 1988 and his Chesapeake Capital Corporation Diversified Program which currently has $202M under management quotes in their pitch-book that “We evaluate historical prices only. We do not use any fundamental data.”
After all, there are many ways to make money in the markets. Some rely solely on fundamental analysis, some on reading order flow and price action and others trade a combination of both.
Which approach do you prefer?
Trying to predict market moves based on how you think investors/traders across the globe will interpret the myriad of financial news hitting the market every single day (fundamental analysis) or looking at what they are actually doing and make trading decisions based upon that (technical analysis/price action/order flow)?
“For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctorwho says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are responsible participant in the market, you always want to know where the market is-whether it is hot and excitable or cold and stagnant. You want to know everything you can about the market to give you an edge.”
– Bruce Kovner in Market Wizards