Friday, May 29, 2009

By Sean Hyman Years ago when I started out as a stock trader, I learned that you’re supposed to buy the strongest companies with the best earnings. In other words, you’re supposed to look at a stock’s fundamentals. Easy right?

However, later on, I found out that while earnings may tell you which company to buy, that data in itself won’t tell you the best time to buy.

Some stock traders say charts are the best tools to figure out when to buy a particular company. And it’s true: You can technically trade any chart. But charts aren’t the end-all, be-all of analysis either.

As Chuck often says here in FX University, fundamentals push trends, not charts. And indeed, charts don’t tell you everything. They really just illustrate the trends so you can find the best levels to buy at.

But charts will NEVER tell you which stock to buy, as analyzing a stock’s fundamentals will.

If you already know that a stock has better earnings, then you’ll notice the stocks with faster earnings growth will have more momentum behind their trends on the charts. That’s something technicals lack.

So both schools of thought have their strengths and weaknesses. Therefore, I decided a long time ago to marry the two together in my trading. As a stock trader, watching fundamentals helped me weed out the bad companies, and find a basket of stocks worth monitoring, while the technicals would tell me “when” to buy any one of these stocks.

Guess what? I still use the exact same process to choose currencies…

The Marriage of Fundamentals & Technicals…How that Works for Currencies

As a currency trader, I still choose my currencies based on fundamentals, then figure out when to buy based on technicals. Only instead of watching a stock’s earnings for fundamentals, I watch a currency’s inflation.

So if I can identify the countries that have higher inflation and ones that are likely to have inflation rise even higher, I have my “basket of currencies” to look to.

As you know, currencies trade in pairs. Therefore, as a currency trader, you need to pair the winners with the losers. Personally, I love to bet on unfair fights. I pair my champion currencies against the underdogs – the currencies with the really horrible fundamentals.

I have one site that points all this out very easily for me. It’s www.tradingeconomics.com. I can quickly scroll through their fundamental graphs and see who’s at the top of the list and who’s at the bottom of the barrel. Then I know what to pair against what.

Take a look below and I’ll show you what I mean. The first column is Inflation (gauged by CPI on a year over year basis). In the middle we have the GDP numbers (on a year over year basis) and on the far right you will see the interest rates of the major countries.

Pair the Winners with the Losers!

How to Tell Which Currencies Will Win AHEAD OF TIME!

High inflation tells me AHEAD OF TIME what central banks may have to raise interest rates sooner than others to tame their inflation.

Strong GDP growth tells me how well (and how quickly) an economy is expanding, which will also tell me a lot about the sentiment for that country at the same time.

Then, I also know that the “big money” is a group of “yield seekers.” So I also like to find countries that have high rates relative to the others but also are likely to go higher too. That’s where the final column to the right comes in.

Now, as I glance over those three columns for common denominators, I see that Australia is at or towards the top of the pack across every category. They have the next to highest inflation, the ONLY positive GDP growth and the very highest interest rate right now too. So that’s a no brainer. Also, I see that New Zealand ranks high too. So that could be a second best pick.

Then I look to the bottom of those charts for common denominators and I see that Japan and the U.S. are low on the list, if not the last on the list in some cases.

Therefore, I know I ought to keep an eye on AUD/USD, AUD/JPY, NZD/USD and NZD/JPY as four top currency pairs to watch. So this tells me “what” to buy. However, it DOESN”T answer the question of “when” to buy them.

Tomorrow, I’ll tell you how I know “when” to buy any of these four currency pairs.

Until then…happy trading!
Sean Hyman, aka “Professor FX”

P.S. By the way, if you’ll notice, my two top currencies match Chuck’s from yesterday’s based on the long-term fundamentals. Right now, Chuck’s monthly newsletter, Currency Capitalist has the strategic long-term ways to buy these currencies. Click here for details on how to secure a risk-free trial of Currency Capitalist.

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