One of the questions I am often asked is whether I am a fundamental or technical trader.

I see myself as a discretionary technical trader, at least so far as entry and exit is concerned.

By discretionary I mean although I have a set of rules, one of my rules says I don’t have to follow to my rules. Now I know that sounds like an oxymoron but its presence allows my intuition to play a role. Of course I need to be careful that it is my intuition that is coming into play rather than a ‘rat brain’ impulse. How I do that, I’ll leave to another entry.

By technical I mean I use charts to define the conditions under which I enter and exit a trade. It also means I use theories of technical analysis that explain the nature and structure of markets: Market Profile, Wyckoff, and the Ray Wave (my own contribution to the field - an objective Wave Theory). I don’t use other common technical tools, for example, moving averages, RSI etc.

By ‘define the conditions’ I mean I look for certain factors to take a trade:

  • What is the trend? Is it likely to continue or change? This gives me my strategy.
  • Are the conditions for low risk entry present: Do I have a zone, setup and entry patterns?
  • Where is my initial stop and core profit target area? Is the risk/reward one that is favourable?

Once in a trade, I need to consider initial trade and risk management. For this, I use a price stop and the questions:

  • A stop that represents a price beyond which I am not prepared to accept further loss.
  • What will be my position size?
  • What does the trade have to look like for me to stay in a trade?
  • What does it have to look like for me to exit? This also involves a time stop.
  • Under what conditions will I stop and reverse (or what does it have to look like for me to stop and reverse)?

Once I have a certain profit, I move to subsequent trade management and here I use the Rule of 3 (a post for another day). I also use the Rule of 3 to increase my position size as the market moves in my favour.

I use technical analysis for all of the above, so in this sense I am a technical trader. But I also use fundamental analysis in the sense that I interpret the ramification of events to provide a context to my trades. The very best trades are those with what Pete Steidlmayer described as ‘unexpected events’: conditions that have moved value away from price but this transition has gone unnoticed by the market. The sub-prime crisis was one such an event, the central banks’ reactions to the crisis is an another.

The sources I use are the Financial Times, International Herald Tribune, and a variety of newsletters, e.g. John Mauldin’s “Outside the Box”; the theory I use is that of the Austrian School of Economics. I find the ideas of Von Misses, Hayek, Hazlitt and Rothbard far more practical and realistic than what passes for economics today.

By keeping cuttings of news items that interest me and spending about 15 to 30 minutes per day reflecting on the connections and ramifications of the items I have collected, I find I am sometimes able to intuit a story that provides the context to an excellent trade.

So, to the question, am I a technical or fundamental trader? I’d answer:

“Technical where entry and exit of the trade is concerned. Fundamental and Technical where the context and perspective to the trade is concerned”.

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