When Technicals and Fundamentals Align


The trading environment is ripe for profits when the technicals and the fundamentals are in alignment. Admittedly, it is hard for the new trader to find good fundamentals. You can still follow the fundamental reports in the news and marry them with the price action.

Sugar is one such market. You can see in the chart above that it is in a strong uptrend. The fundamentals seem to show tightness as well. “Sugar prices exploded, hitting a five-month high in London, amid growing fears for Brazilian sugar output, which is expected to fall for the first time in more than a decade, with rising oil prices seen adding a further kicker.”

A trader needs to have his personal fundamentals and technicals in order too. It’s as important to know what you’re doing and why you’re doing it. That is the subject of my upcoming book. More on that later.

Traders like Michael Marcus or Jim Rogers who have expert level fundamental insight can trade on that information. They often put trades on long before the rest of the world takes action. They are likely to be long at the early stages of the move…when there is less certainty or proof that a move is underway or eminent.

I have a question for you: If someone allocated you $1MM in new assets for a separately managed account, how would you trade sugar? The answer is not “I would follow my rules.” A real client (someone in the know) will ask you what the expectation of a trade is for a late-stage rally, like the sugar chart above. The one you’ve been quoting people is the average expectation of all your trades.

Most of the “expert” system followers are either clueless or have a great deal of faith that a move will emerge. By buying early-stage breakouts you’re effectively saying that you have a great deal of faith that one will show up. But to say that fundamentals are not important is a completely ignorant thing to say. When you lose money trading a system, your mind will still ask “why” this happened. The answer to that question is a fundamental.

I think it’s much harder to admit the difficulty in understanding fundamentals or that it takes a decade to become proficient at understanding them, than to just trade new highs and pose as a commodity expert. Don’t kid yourself, the best commodity traders have a deep understanding of the world we live in and how commodity markets are affected by our consumption and production.

I bring this up b/c I had a conversation this weekend with someone who thought he was an expert systematized trend follower (his words, not mine). And maybe his is, but when I asked him if he was using that title/moniker to mask his insecurity about his ignorance about commodity fundamentals, he blanched, as if to say, “Please don’t ask me anything too technical about commodities.”

It’s true that you can trade without knowing too many fundamentals. My belief though is that unfortunate quote about “funnymentals” has been misinterpreted and misrepresented by would-be’s as meaning that fundamentals are not important. Nothing could be further from the truth.

You need to know build a robust trading system with Mechanica, but you need to understand the fundamentals also. Doing so will help you in your coding…

As a trader, it’s important to know why you say what you say and the emotions behind your statements. Having integrity with yourself is the first step to having it with your clients.

Please note: I reserve the right to delete comments that are offensive or off-topic.