CHAPTER 4.

My 80/20 Rule – Overview of 20% Fundamental

 If you don’t want to trade the fundamental data that is fine, but you should always be aware of
it. Even if you are trading purely technically, the markets may move unexcitedly against your
position due to fundamental data and you need to be aware of what is happening.

Overview of good and bad fundamental news

The table below provides a basic summary of how the markets will generally behave when highly
credible, quality information is released.

Good news Bad news

 Demand for the main indices (S&P, FTSE,  Demand for the main indices (S&P, FTSE,
DAX) will go up. DAX) will go down.
 If the news is area specific the demand for the  If the news is area specific the demand for the
native currency of the event will go up. native currency of the event will go down.
 Government bonds will decrease in demand.  Government bonds will increase in demand.
 Demand for gold and other safe haven  Demand for gold and other safe haven currencies
currencies like the Swiss franc will decrease. like the Swiss franc will increase.

Examples Examples

 Lowering – cut – of interest rates.  Raising – hike – of interest rates.

 Unexpected rise in company earnings.  Unexpected drop in company earnings.
 Increase in government fiscal stimulus.  Decrease in government fiscal stimulus.
 End of war or civil conflict.  Outbreak of war or civil conflict.
 New medical or scientific discoveries.  Reports on harmful effects of consumer
products.

RUFF TIP
 One of the main points to stress around the topic of fundamental information is that you
have to quantify it. You have to figure out if it’s reliable, if it’s important and what it will
do to the markets.
 When it comes to the internet and especially social media like Twitter, the thing to
remember is that there is very little regulation. This means that not all new news is either
relevant or even correct. You have to know what information will actually be used by
traders. If traders won’t use the information then the markets will not react.
There are three main types of news that are worth trading.

i) News events:-It is market-moving global events & are things outside the world of trading
and economics .
Example;- potential outbreak of war, a terrorist attack or a natural disaster, such as the
Fukushima incident in Japan in March 2011.
 Basically, buy gold and sell the major indices on bad news (and vice versa, although
sadly there are very few worldwide breaking news events that are good news).

ii) Scheduled economic releases

 All economic release data is scheduled and readily accessible. Every country around
the world will have scheduled economic data releases and they will generally,
depending on the source. Data falls into two main categories: growth and
inflationary.
 The following table provides a summary of what data to look at in the growth or
inflationary stages

Inflation Growth

 Consumer price index (CPI)  Nonfarm payroll (NFP)

 Producer price index (PPI)  Gross domestic product (GDP)
 BoE Monetary policy (MPC)  Retail sales
 Fed meeting (FOMC)  University of Michigan consumer sentiment index
 ECB Minutes  Philadelphia Fed
 Consumer sentiment
 Durable goods

RUFF TIP
 The good thing about scheduled data releases is that they give structure to your trading week or
month. If you know there are, for instance, five key pieces of data out that month you can
schedule your trading activity around this. Rather than just looking for an intraday trade, you
can make sure you build your trading plan around this potential market-moving data.

Nonfarm payrolls (NFP)

The NFP data is researched, recorded and reported by the US Bureau of Labor Statistics and is intended
to represent the total number of paid US workers in any business, excluding the following:
 1. Government employees.
2. Private household employees.
3. Employees of non-profit organizations.
4. Farm employees (this is why it is called the nonfarm payroll).
 There will be volatility and market movement around the NFP, which for intraday traders
presents a good opportunity to enter short-term trades. You shouldn’t try to predict the figure
at all – you don’t need to.
A good figure of NFP – better than the consensus forecast – will create demand for the major indices
and send the price up. The opposite will happen for safe havens like gold and the Swiss franc; there will
be less immediate demand and the price will go down.
 Chart 2 is a 15 minute gold chart after the December 2014 NFP figure was released. This figure was well
above the consensus range so in the eyes of the trading world this was a huge sell for gold.
 However, the big players, market makers, institutions and trading robots did not let this happen. Gold
rallied in two separate movements (the up arrows) over 84 ticks. This is more risk than any retail or indeed
hardened professional trader could take if they had gone short on the back of this very positive data.

 Gold was then pushed to a high of 1207.68 over the course of the next 30 minutes of trading. It then made a
small attempt to take profit at the top of the range for 15 minutes.
 It was only 45 minutes after the NFP release that the expected and true movement on gold emerged: a sell
off. Gold then sold off relentlessly for 200 ticks.
 You can believe whatever reason you like for this. It is a fact that the market knows people will sell gold on
a very high NFP figure. Remember the figure was 113 points better than the consensus and for the NFP this
is massive. Between 1203.55 and 1207.68 we saw a fundamental short.

RUFF TIP
 A key lesson to learn is that professional traders use what other traders expect to happen
against them in the short term.
  Large banks, institutions and the markets in general can use the NFP or any other key
data for manipulation. In this instance of the good figure, everyone knew that gold should
go down. So gold went up past the 1% to 2% risk-reward margin for the average trader,
and stopped them out.
 Four M15 closes or one H1 candle later, gold saw a significant sell off. Retail traders
lost out, professional traders won more.
 It’s not always about fastest finger first. Weigh up the data and the technicals. There will
always be a second wave of movement and an opportunity to make money after the
release.

iii) Central Bank Key Speakers

 It is commentary from policy makers such as (European Central Bank), (Bank of England) and
(Federal Reserve).
 There are few other events that move the markets like unexpected or previously unreleased
comments from the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England
(BOE

Trading example

 This is an example of a press release from the former Fed Chairman Ben Bernanke on 18
September 2013 and the impact it had on the S&P 500. The press release said:
“To support continued progress toward maximum employment and price stability, the committee
today reaffirmed its view that a highly accommodative stance of monetary policy will remain
appropriate for a considerable time.”
 Chart 3 shows the S&P 500 from the H1 and D1 perspective after the market learnt of the Fed
press release and Bernanke taking a dovish stance on quantitative easing (QE
  At this time the markets were still hungry for growth. Inflation was certainly not the main focus for traders,
so this comment was a huge boost to the perception of short-term prosperity. This comment came well
before the Fed began to taper QE and there had been many rumours and much speculation as to when the
Fed would inevitably reduce QE.
 The comment reiterated that the “highly accommodative” stance would remain appropriate for “a
considerable time” and this was enough to see the S&P 500 rally over 240 pips in the space of an hour.
 This is an example of an official Fed press release taking the markets by surprise. It was not the fact that
the markets were not anticipating what was said, but more that it stopped the rumours and meant for the
short term, at least, it was highly unlikely the Fed would taper QE. Therefore there was a rally into the
already bullish indices.
 As trading is so accessible these days, the ability to profit from volatility has increased dramatically. This
in turn means that when you hear such a clear and tradable comment as in this instance there will be
significant momentum brought into any strong directional move.
 This is great if you are on the correct side of the trade. It also means, however, that what goes up will come
down much more aggressively, as shown in the D1 chart.
 In my experience, when fundamental comments are driving the market you have to be very cautious in
picking a place where that momentum will stop. If you miss the initial central bank comment you may want
to switch to the 15 minute charts and look for a continuation pattern. However, I’d suggest if you miss the
initial wave then most of the time it is just worth staying out of the market altogether. It is sometimes
possible to enter the market for the inevitable correction, but this will need both timing and patience.

The influence of the professionals

 We’ve already seen that professional traders, banks and institutions all have the ability to move
markets in any direction they choose prior to a scheduled data release and for a short period
after. This can cause uncertainty and considerable doubt for the average trader. Remember that
the markets are ruthless in stopping out weak traders.
 Fundamental data is a red flag to professional traders. They know what you are likely to do
based on the data. They know your average risk parameters and they know that you will doubt
yourself.
  As I have explained, once you understand the people within the markets you can start to
understand your competition. You can then adjust your strategies to compensate for this factor.

The factor of time in fundamental moves

 The longevity of the move is dictated by whether the news is expected or unexpected. You may
hear the term “priced in” when trading and this means that the markets (especially the futures
markets) have taken a view as to what will happen in the future with regards to fundamental data
and set a market price accordingly.
 The NFP we looked at above for gold is typical. The market was expecting a good figure, but not
113 points better. There was room to push gold significantly higher before letting it fall in
accordance with what the data actually should do to gold. There was 45 minutes of pain, which is
a tremendous amount of time in intraday trading, before the single 15 minutes of pleasure and
profit-taking.
 This happens in most markets, from bonds to oil. If anything unexpected hits the markets then this
view may be either enhanced or detracted from, leading to an overextended move as traders
readjust their positions accordingly. Anything that happens that is exceptional and completely
unexpected by the markets, like a terror attack, once again levels the playing field. Any traders
basing their decisions on that news will all be trading at the same time and with the same
information.
 When markets move around new data and news it is important to remember that there may be
existing sentiment. This is the 20% I refer to and may be the underlying trend. If this new
information contradicts the current sentiment, traders may use this as a short-term measure to
trade against that trend to make money.

CHAPTER 5.
MY 80/20 RULE – OVERVIEW OF 80% -TECHNICAL