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.


Latest posts by Michael (see all)

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

  • Frank

    Another way to look at it as a systems trader is that you can derive the fundamentals via the  signals which endure over a given period ie) a trend begins and doesn’t look back. Guess what? A fundamental is at work. Put the pieces together and try to figure it out, if that’s what makes a trader sleep better.

  • You’re likely right…the title/moniker of the “expert” systematized trend follower could be their way to mask insecurity about their ignorance of fundamentals.  But, let me present another side…

    There is another level of system trading.  Requiring an additional set of skills in addition to the technical and fundamental. 

    ..these system traders must forego all their hard-earned knowledge and allow the system to work as designed once placed into production.  They cannot care that Sugar fundamentals are aligning with price.  They are indeed working on the average expectation of all their trades.  And cannot get caught on the slippery slope of asking “why” they’ve lost money on the trade.

    In some ways, these system traders are monks.  Having to purge all trading belongings and follow only the rules given by their system.

    But, I did mention it being a remote chance you were talking with this level of system trader.  Anyone in this category would not use the word “expert” in their title.  The longer I trade this way the less of an expert I become.

    Look forward to your book.  Of course, only in designing my systems.

  • Anonymous

    Pure system traders have evolved into HFTs or algos, both of which run rampant in the commodities futures markets. The more fundamentals you learn, the more of them you can test in your system. That’s how you backtest to advance your model, not by adding or removing ADX or other technical indicators. Most system students are using the indicators to avoid feeling the feelings you feel when you lose money or have great insecurity.

    I think your “monk” reference is interesting, but I’ve only met 3 or 4 in 25 years who would fit that description. They are the ones who truly have no judgment about me or you or what we look at or the manner in which we trade.

    Knowledge doesn’t always serve the trader. It’s mandatory to break up the heuristics to focus on the ones that make you money. It’s the data you don’t know that you don’t know that might become your best allies…the fundamentals.

  • Pingback: Monk Traders | TaylorTree()

  • Adam

    Very nice. 
    I’m both a discretionary and systematic trader so this post hits close to home.Truly to say the “funnymentals” quote has been misinterpreted is an understatement. Other quotes about “Why” are also often misinterpreted. Many apply these quotes in contexts that are not appropriate. Not everyone who asks “why” is insinuating causality. “Why” can also indicate context. In real life, everything is context dependent.  There is a major difference between if-then deductive reasoning and intuitive contextual reasoning. Most everyday real life decisions are context specific. But systems traders base their decisions on past experience and the average expectation of all their trades often at the cost of losing the specific context in which each trade occurs.  If a trader is out of sync with the specific way his system interacts with the market he may face serious emotional challenges following his system. Consciously, or unconsciously, systematic traders may deal with this issue by drastically dialing down their position-size. There is a good reason why good discretionary traders have historically consistently produced better risk-adjusted-returns than systematic traders.    

  • Anonymous

    that’s why a system will not work all of the time and go through some
    horrendous periods. A discretionary trader is a trader for all seasons.