This has been an age old debate. Which trading method should you adopt, which is better, do both tell the same story, is Technical Analysis predictive. Not trying to create a stir here but just to open the eyes of the newer traders for them to decide.
Brexit Case Study – Quick Background
Some quick background, in 2016 the United Kingdom decided to have a referendum to decide whether they want to stay in the European Union. On the 24th June 2016, the UK voted themselves to exit the EU and the Sterling (GBP) plunged.
Over 3 years later, until today, the GBP has not recovered to its original levels. So, for those traders who subscribes to the idea of
‘Don’t worry, the price will always come back, I don’t have to put Stop Loss’
are probably still holding on to their losses. Chart below showed that the GBPJPY plunged 1,800 pips from 157.65 to 139.60. A 11.4% drop in the currency pair in one day.
Fast Forward 3 years later – (Today: 23 Oct 2019)
The current UK Prime Minister, Boris Johnson, has managed to strike a deal with his counter parts in the EU for the UK to exit. However, he needed this UK parliament to approve the deal and get the ‘divorce’ process started.
On this positive news, the GBPJPY rallied 7.5% from (A) to (B). See chart below. Question is why did it stop at 140.70 and not higher.
Fundamental Analysis (FA)
In 2016 – The UK wanting to exit the EU created unforeseen uncertainties. Naturally this instability will affect the currency, hence we see the Pound did indeed plunge.
Point (A) in chart above, the exit deal is agreed. It gives more clarity and a positive boost after months of failed negotiations. The Pound rallies.
Point (B) in the chart above. Why did price stop here? The FA camp will probably say that the market is waiting for the UK parliament to vote before they can proceed. The market was waiting for the outcome of the voting, hence the price stopped at (B).
Honestly, everything makes perfect sense from the Fundamental Analysis point of view.
Technical Analysis (TA)
Let’s have a look at the Daily chart of GBPJPY. The same points (A) and (B) are indicated there accordingly.
Price fell hard and formed a Double Bottom. In the classic Technical Analysis study, the Double Bottom is a potential reversal pattern. Coupled with a Bullish RSI Divergence, it gives a higher probability that the price will reverse and indeed it did.
Broke above the resistance and fell back to Point (A). Another classical TA theory, resistance level turned into a support and price bounced off at (A).
Why did it stop at (B)? Again, the classical TA theory holds. There was a previous Support turned Resistance level at (B). Hence the price got resisted at (B)
GBPJPY H4 Chart
At the Resistance point (B), the chart formed another classical reversal pattern a Rising Wedge (one of my personal favourites) with an RSI Divergence. Price eventually fell after the UK Parliament voted.
“Did the chart predict in advance that the UK Parliament vote was going to fail?”
GBPJPY H1 Charts
Let’s zoom in deeper into the smaller hourly time frame and see what story we could have gotten from it.
At the Resistance (B) level, there formed a Bearish Bat pattern indicating a Sell trade. Price broke below the Rising Wedge, Point (1) as marked out in the chart, showing us another bearish sign. At Point (2), the classical Support Trend Line turned into a Resistance Trend Line again gives us a Sell indication.
Point (2) was when the UK parliament voting came to light. The initial vote was to approve the Brexit deal that the PM had agreed with the EU. It caused the GBP to rally. Several minutes later, the Parliament voted again to not rush the Brexit process to be completed with 3 days. Effectively delaying the Brexit process for possibly another 3 months. A negative sentiment hangs over the GBP. Hence the drop.
“So, what kind of trader are you? Are you a Fundamental Trader or a Technical Trader?”
Know yourself. You have to know which method resonates better with you. Get comfortable and start Trading in the Zone (as per Mark Douglas’ book)
My personal take (purely sharing my views ONLY)
I started my trading journey in Stocks where FA is very important. Reading and finding good companies to buy. You name it!! I studied it!! From the Financial ratios, to the Financial & CEO reports, Market Analysts, Brokers reports, Independent analysis. I did it all.
Slowly picked up Technical Analysis to time the market. Finding the perfect time to buy good into the market. You might have heard this quote:
“Fundamentally Driven, Technically Executed”
I eventually switch more towards Technical Analysis when the charts showed signs of an impending crash before the Lehman crisis back in 2008/2009. I too eventually switched to Forex Trading after exploring Indicies, Options, Futures Trading. Well….. that’s another story to tell another time.
My philosophy today. The charts can tell you a story on what is about to happen. The Fundamental news would be the catalyst to actually move the market. I personally still read and understand the Fundamentals, but I have tilted more towards Technical Analysis some years ago. Harmonic & Classical Chart Patterns in particular.
Thank you for reading
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