“Oh How the Mighty Can Fall”

When the Strongest Currencies Will Topple, and How to Easily Tell When It’s Time to Sell

Who says you can’t have the “best of both worlds?” I say we can…at least when it comes to trading foreign currencies.

For years, traders have debated about whether fundamentals or technicals drive foreign currencies. The “fundamental guys” say you should just watch a country’s unemployment, GDP numbers, and overall debt to research foreign currencies.

The “technical guys” say you can learn everything you need to know about a currency by watching the charts.

Traders on both sides act like you have to choose one or the other. However, I’ve always said that there are benefits to both, so why not use both in your trading?

Therefore, in my own analysis, I study market sentiment along with both fundamental and technical analysis. I’ve found that I make better trading decisions when I have more information.

Also, over the last decade of trading, I’ve discovered fundamental and technical traders tend to do just fine in “up” markets. But the pure fundamentalists are left scratching their heads when overall markets start to fall.

You see, there’s just never been a good “fundamental sell signal” in my opinion. However, this is where technical analysis shines.

How Technical Analysis Has Saved my Butt Through the Years

It’s technical analysis that has saved me through the years. It’s the reason a major downturn or recession has never hurt my stock and currency portfolios.

Why? It’s because there are several indications on the charts that tell you when the market may have far more downside potential than upside potential. (And remember, stocks and currencies fall faster than they rise. So if you catch those huge down moves, you can rack up some nice profits!)

I’ve found that technicals reign during these downturns because no one focuses on fundamentals when everything seems to be crashing and burning.

You see, logic tends to disappear when markets start to fall. Fear takes over and investors simply react. Fear will trump fundamentals every time because fear is a much stronger emotion.

I don’t want you to think I’m making this up, so let’s look at an example from the past. As you probably know, the Australian dollar is a fundamentally strong currency. For good reason – it has a lot going for it – strong exports, high yield, support as a commodity currency, etc.

Below is a chart of the Dow Jones during the recession/bear market in stocks. I’ve dropped the Australian dollar on top of it. As you can see, this fundamentally strong currency fell even faster than the Dow!

The reason? Everyone threw fundamentals out the window when stocks started to crash and fear gripped the market. Check it out below…

The Aussie Dollar Plunged with Stocks Even When the
Aussie Had the best fundamentals!

Here’s where the pure fundamentalists get confused.

Fundamentals Don’t Work During a Market Downturn!

From a fundamental perspective, Australia held up far better than any other G-8 country out there during the last bear market and global recession.

In fact, its GDP NEVER went into a negative reading like ALL others did. It kept a slightly positive growth reading the entire way through that recession (thanks to China buying up commodities from Australia).

Yet, that didn’t stop the Australian dollar from getting creamed. In fact, the Aussie was one of the currencies that fell the fastest, and the lowest. Now from a purely fundamental perspective, this doesn’t make any sense at all.

But there’s another side to this story.

In good times, traders and investors alike buy up the strongest fundamental stories out there. (They also tend to have the best technical uptrends on their charts too. So even the technicians/chartists are buying too).

But as the markets fall apart, the pure fundamentalist traders sit waiting on economic data reports as a guide. By the time those reports are printed, it can be far too late to realize a downturn is coming.

That’s why I say that there’s never been created a good fundamental sell signal ever. Fortunately, there are several good technical indicators that can tell you when it’s time to sell.

In tomorrow’s special Saturday edition, I’ll give you three different indicators that can tell you exactly when the strongest fundamental currencies will fall apart this year. Speak to you tomorrow.

Happy Trading!

Sean Hyman, Editor
Currency Cross Trader