Objections to Fundamental Analysis

From Volatility.RED

There are many Traders that are opposed to the concept of Fundamental Analysis. There are various reasons for this but what we will do in this Wiki is point out a few of the most popular objections and then provide some context on why they may not be well-founded objections.

This Wiki is part of our comprehensive Fundamental Analysis Wiki. Be sure to check that out HERE.

Objections to Fundamental Analysis

Objection #1: Applying the Fundamentals is Unnecessary Because You Only Need to Look at the Charts

The first objection people have to fundamentals is that you only need to look at the charts and that applying fundamentals is too complicated and an unnecessary process.

This is not correct for several reasons. In later sections, you will hear us refer to Technical Analysis as being like driving a car but only using the rearview mirror to navigate your journey. It will work sometimes, such as on a really long and straight road, but overall you will have a lot of accidents and it would be ridiculous to try and drive a car like this.


Looking at the above chart is confusing yet many traders think that they can use all kinds of indicators to predict future price movements. Indicators, such as the Stochastic, have nothing to do with why the price is moving; it merely tells you that the price has done something and shows you this information in a visual way.

Another logical point to consider is that professional institutional-level traders use tools such as the Bloomberg terminal and Reuters Ikon. These are very famous information gathering terminals that you may have heard of before. They are built specifically to get news and information to traders as fast as possible. The cost of a Bloomberg terminal is about $2,000 USD per month and comes with a two year contract. So in order to have access to a Bloomberg terminal you basically need to spend $50,000 right off the bat.

Why would these fundamental tools be so expensive if big funds and professional traders made their money staring at price charts and indicators which can be found for free literally anywhere? Really try and think about that for a minute. Is it actually possible that the road to riches is floating around for free for everyone to take advantage of? It simply doesn’t add up that fundamentals are unnecessary when so many professional traders and money management firms are paying such high prices to get this type of information as fast as possible.

Obviously, fundamentals help them make smart trading decisions which is why they are willing to pay a lot of money for that information. Have you ever heard of a large money management firm paying $2,000 per month for a technical indicator tools? Maybe there are some but we would be very surprised if any of them did.

Objection #2: Fundamentals are too Difficult Unless you have a High-Level University Degree

The next objection that people have, particularly retail traders, is that fundamental trading is hard or too difficult to understand unless you have been trained at an institutional fund or have some genius-level degree. If you go through all our information on fundamentals you will see that fundamentals are actually simpler than technicals if you know what to focus on and what to look for.

It is true that Fundamental Analysis can get complicated if you let it but we will not be looking deep into corporate earnings and debt sheets to find the information we need to make a good trading decision. Rather, we have tools that do the heavy lifting for us so that we only need to focus on what is important to the market right now at this moment. We then simply look to trade in line with what the market thinks is important. Why would we ever want to trade contrary to what the market is telling us is important? The market is king and we need to trade in line with the king, not against it.

Researching the fundamentals can be broken down into a simple step-by-step process that will literally only take you a few minutes each day. It certainly takes much less time than staring at price charts all day waiting for some sort of signal for you to be able to place a trade.

Objection # 3: All News is Priced into the Markets

Another related objection is that all past, present, and future news is priced into the market at any given time. This is related because understanding the news is a big part of how institutional traders trade using fundamentals.

Many so-called experts teach a method called Efficient Market Hypothesis or EMH for short. EMH states that all available information is priced into the market making any moves in the market totally random and therefore impossible to make consistent profits.

In a short demonstration, we will show why this is complete nonsense and that anyone who perpetuates the myth of EMH has probably never tried to trade and certainly has never traded successfully. EMH is an academic study that has no real application to the real markets. So if you are unfortunate enough to come across one of these naysayers don’t get discouraged. You can make your stake in the Forex or any other markets but you need to focus on the correct things which we will uncover in this and many other Wikis on this site.

The example that we will use is the Bank of Japan’s (BOJ) quantitative easing (QE) program which was launched in April 2013 represented at point 1 on the chart below. When this program was made public we found out that it essentially involved the unlimited printing of Japanese Yen in order to devalue the currency and encourage inflation, spending, and growth in the Japanese economy. Of course, according to the basic laws of supply and demand, when there is an oversupply of something the price will fall and the same is true with currency.


The chart above is a weekly chart of the USDJPY currency pair. Since JPY is the second part of the pair the USD is going up against the JPY. Stated another way, the Yen is going down against the USD. You will notice that the USDJPY was rallying long before the QE program was made official because the market was taking clues from the Bank of Japan for months before the announcement actually happened and attempted to price in QE.

This is a great time to point out that when the market expects something to happen it will attempt to price it into the market in order to make some nice profits. This is another way that we can follow along with the market and make some nice pips as well.

In this scenario BOJ simply printed more money quicker than the natural rate of demand could absorb. When the program was launched there was a very high expectation from some well-respected currency analysts that the value of the Japanese Yen would fall over the following months.

The overall expectation was that the pressure of this QE program would eventually lead to the currency depreciating against the USD and rally the USDJPY pair up to 110.00. If the USD goes up against the JPY then this means that the JPY is actually falling.

This is a very well-documented event but when the program was launched the price did not move up to 110.00 for over a year. It took about 15 months for that piece of news to get fully priced into the market. This allowed traders plenty of opportunity to get in and take advantage of this move without worrying about missing out the second the news was announced. Under EMH this kind of event is impossible, which as we have proven, is obviously completely wrong.

At point 2 the USDJPY rallied on the back of speculation that the BOJ would have to add to their QE program if they were to meet their inflation target of 2%. This is because inflation barely moved up from the first QE efforts and the market felt that the BOJ would need to step it up to get the job done. This was the market attempting to price in the QE2 program.

On October 31, 2014, the Bank of Japan announced the expansion of its Quantitative Easing program. However, as you can see from the 1,000+ pip rally after the second QE program was announced that there was plenty of time to get in and make a nice profit from this second piece of news.

This demonstrates that the market will always attempt to price in the news. However, it’s not able to fully price in or even understand the longer-term effects of this news on the currency valuation. This is not a unique event in the Forex market.

It is true that the USDJPY did rally for weeks in anticipation of the QE program being launched but by no means was the move even close to being priced into the market. Nor were these expectations priced into the market instantaneously as EMH would have you believe. When QE was launched the price was around 96.000 and eventually the rally gassed out around 126.000. That’s about a 3,000 pip rally over 2.5 years that you could have been trading on the long side. That’s right; you could have had an easy trade idea for 2.5 years if you just embraced learning and applying the fundamentals.

There are countless more examples, even on short-term day trading time frames, of times when the news is not fully priced into the market. This gives us a chance to see what is going on and get in to take advantage of some nice price moves. The truth lies somewhere in between the market attempting to price in the news and then reacting to the news itself.

The previous objections tend to be the most common reservations that people have when approaching fundamentals. There is really no reason to be concerned with these because what we are going to show you next will allow you to see for yourself how simple and how powerful the fundamentals really are.

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