PulseRes

My favourite books, judged by reading them more than once are: 1) The Alchemy of Finance 2) All the Market Wizards 3) Reminiscences of a Stock Operator

Financial market participants new to the game of investing or trading should think carefully about whether they approach the subject matter focusing either on fundamental analysis or technical analysis or an integrated approach. Technical analysis is easy to define: it basically involves the study of past and present market prices in an attempt to forecast the direction of future prices. However, with fundamental analysis (in its traditional sense) the definition becomes a little blurry as one analyses whatever factors one expects to eventually have an impact on market prices. Therefore, for the purpose of this discussion, I would like to expand the definition to incorporate the analyses of underlying factors as well as how financial market participants interact with those factors (as implied by market prices), thinking more in terms of a “strategic” analysis. I would like to outline two reasons why an integrated approach is desirable, where fundamental analysis decides the broad strategy (direction and position size) and technical analysis the tactics (entries and exits). First: What do the world’s top traders such as George Soros, Bruce Kovner and Paul Tudor Jones have in common? Two answers are immediately apparent: they are all listed on the Forbes Billionaire List; and they all use an integrated approach. Second: central bankers. Judging by the reactions of the market to fundamental news announcements, one can argue that central bankers are one of the most important pieces of the puzzle. It is somewhat amusing that some traders who swear to be purely technical in their approach are the first to react to the release of such information. Central bankers most certainly do not use technical analysis in their decision making process, although the state of markets does enter the equation; however, most of their decision making does involve a specific type of “fundamentals” analysis, not necessarily the type taught in business school. Furthermore, given the fact that they do not necessarily have any more information at hand than what the public is able to obtain, the key question becomes how they actually string together all these bits of information to derive their decisions and news blabber. Thus, there is a clear advantage to be gained over one’s competitors by learning to think like a central banker instead of just being a reactionary market participant. In conclusion, why should one limit oneself to one or the other and treat this as a mutually exclusive choice if a balanced approach between technical analysis and some in depth strategic analysis of fundamentals clearly reaps much better results? --- Rene Riedel is a professional financial speculator and founder of Pulse Research, an independent macro-level fundamentals research and analysis company, geared specifically towards forex, bond, stock indices and commodities traders who are utilising technical analysis and are seeking an additional edge in their trading

Various statistics have time and again emerged indicating the shockingly low numbers of profitable traders. Although factors such as getting into the zone, not setting stop losses, or not letting your profits run have been amply discussed in the past, I would like to focus more on some reasons that are rooted in the way that our minds as human beings have been wired by nature. Firstly, as a person it very important to have an “identity,” which manifests itself via the biases one has in different matters. Secondly, to a certain extent we have all been wired to do and be what society expects. In general, one does not deviate too far from the norm for the fear of becoming an “outcast”, yet should one not have an “identity” or strong preferences or views, one is usually regarded as having self-esteem issues. As we will explore in a moment, these exact “negative” traits actually come in quite handy just before having to pull the trigger on a trade. When a news event causes a run in prices, it is human to judge the information either as positive or negative and then join the crowd if they are trading in that direction. Firstly, you act out your “identity” in that you make a decision on the information, and secondly you feel comfortable with the trade because if everybody else thinks this way it must be right. As novice traders have most probably noticed, this often results in getting whipsawed. Most often, these experiences prompt the trader to go down the path of “learning” more. However, learning more is not necessarily what will solve the problem, instead second-guessing your decision might be more beneficial. By second-guessing yourself and losing your “identity” for the duration that it takes to analyse the situation, you automatically do two things: open yourself to the possibility of going against the crowd for a much favorable risk/reward ratio and, secondly, perform a critical analysis to see the situation from both the perspectives of both a buyer and a seller. This allows you to quickly identify the balance of risks and come to a well-reasoned conclusion. Should the traders on the opposite side of the coin also have some solid reasons for taking action, you might want to choose to go against the herd; conversely, should traders on the opposite side have weak justification for their position, then the move is most likely to be sustainable and you will do better by joining the herd. For many years, I thought that when analysing a situation and I was unable to decide promptly on a bullish or bearish approach that I needed to “learn” more to actually be able to choose a side decisively; it took a long time to come to the realisation that these situations, in which I found myself in an infinite second-guessing loop, are actually the situations in which the market exhibits extreme volatility and that are usually best avoided. In a nutshell, the benefit of going with the crowd in a certain direction depends more on whether there are risk factors present or not from the opposite side than it has to do with the “strength” of the information that has just been released. Rene Riedel is a professional financial speculator and founder of Pulse Research, an independent macro-level fundamentals research and analysis company, geared specifically towards forex, bond, stock indices and commodities traders who are utilising technical analysis and are seeking an additional edge in their trading.