Strike a Technical/Fundamental Balance

04/11/2011 10:00 am EST

Focus: STRATEGIES

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Which type of analysis technique—technical or fundamental—is best is the age-old question, but currency analyst Kathy Lien explains how to combine fundamentals with technicals to trade more accurately and effectively.

Traders look at the technical aspects of a chart of course, but also the fundamental news out there affects their decision making. Our guest today is Kathy Lien to talk about how she handles those things. Kathy, how should a trader combine technical analysis and fundamental analysis in their trading?

That's the old age debate, right?

I think that overall, you see people are either exclusively fundamental or they're exclusively technical. I think that's a very dangerous mindset to have because what traders have to realize is that a lot of times fundamental factors will drive price and those are the factors that will affect how the chart formations actually form. Whereas technicals, a lot of times, can help explain bizarre price-up movements in the currency market and smaller movements as well.

So I think that it's very important to combine both because you may have an environment where, for example, there may be some good pieces of US economic data coming out. But, for whatever reason, the market is very bearish US dollars because maybe overall there's a very strong risk appetite in the market-everyone's really happy so they're selling dollars as a funding currency. 

So it's really important to combine both. Charts can tell you how people feel. They can tell you whether the currency is falling aggressively it's because people are not buying bullish dollars. So it's important to find scenarios and trades where both technicals and fundamentals are aligned.

You want to make sure you have maybe a positive technical set-up such as maybe a breakout to the upside combined with good data. So that is when you have the highest-quality trades. 

I think that when it comes to trading, it's not about taking every single trade that comes up. It's about taking the highest-quality trades, and combining fundamentals and technicals can help you do that.

How far do you go back on a chart, whether it's a one-hour, a four-hour, one-day, a yearly chart even to see where levels would be that you will be paying attention to going forward in trading?

Typically I look at the daily charts. For example, right now we've got a lot of currencies trading at significant highs; either a three-year high, five-year high, and so forth. So the daily charts are not really that useful because the next resistance or support level is further away than the daily chart would show us. 

So at that time, I might translate my chart or transfer my chart to a weekly chart or a monthly chart, but usually I will do more short-term trades and then look at the daily charts for key levels.

I also know that during periods of high volatility, sometimes those chart patterns go out the window, they don't operate, and the market doesn't behave normally, if you will.  What do you do in those instances?

In those cases, it's really important to be aware of the type of trades that you put on and be aware of where your stops are because if the market is very volatile, then if it is your intention to be in the trade for a long term, maybe you want to use a wider stop, lower leverage. 

If you don't want to sit through the volatility, then maybe you should just get out. 

So it's important to realize that in times such as now when there's a lot of tension in the global markets, there's a lot of reason for anxiety, either you have to take a longer-term approach or you have to get in and out quickly and not allow the volatility to kill you.

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