Three Little Rules

Three little rules

Jamie’s rules for forex traders:

1. Understand the basics of technical analysis. You don’t need to be a quant-geek to be successful, but understanding the first ten chapters or so of the classic Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy would be a great start.
2. When the fundamental and technical outlooks for a currency differ, always side with the techs.
3. When the fundamental and technical outlooks for a currency converge, go for it! Take a more aggressive position than normal.

Jamie Coleman of ForexLive.com offers these pearls. I ordered John J. Murphy's book, as suggested in Rule 1, and was pleased to learn that Chapter One, Philosophy of Technical Analysis, reveals the source of Jamie's Rule 2.

The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most. Usually they come back into sync at some point, but often too late for the trader to act.

One explanation for these seeming discrepancies is that market price tends to lead the known fundamentals. Stated another way, market price acts as a leading indicator of the fundamentals or the conventional wisdom of the moment. --p. 5

My own recent experience with the current bear market rally in stocks had me taking quick profits and moving back to the sidelines, waiting for the inevitable correction. It still hasn't come. I stayed out, based on the fundamentals not improving much. Yet the trend took off and left me there waiting for the correction. In this case, the wisdom of rule number two becomes apparent. Market price did indeed lead the known fundamentals. AIG went from 36 cents to $2, etc.

Jamie Coleman's 'little rules' are expressed so simply, they embody the quality of the Italian word, sprezzatura, a term that originates from Castiglione’s The Book of the Courtier. It is defined as “a certain nonchalance, so as to conceal all art and make whatever one does or says appear to be without effort and almost without any thought about it.

These nonchalant rules helped me to sort out the relative importances of fundamental and technical analysis when they are in conflict. Thanks, Jamie.

http://en.wikipedia.org/wiki/Sprezzatura

I picked up a nice used copy of John J. Murphy's classic at my favorite shopping place. http://www.abebooks.com/