Don’t try to explain a fundamental event with technical analysis.

This week we are seeing some small reversals in some of the currency pairs, particularly the USD and JPY pairs. The main reason for this is the upcoming G7 meeting this weekend in Washington DC. This meeting is for the financial representatives of the largest economies in the world, the same countries whose currencies we trade. Typically at these meetings, currency values are discussed. Most of the time it is the Japanese Yen weakness, but this time it may include the US Dollar weakness too. This increases the risk of holding short positions in either currency, which to professional traders means unknown risk and a reason to get out of their trade. So the recent JPY and USD strength is more because of traders exiting positions rather than putting on new positions. If all goes well, they may come back into the market after the meeting and sell the JPY and the USD, but time will tell on that one. However, I am seeing new traders trying to find a technical reason for the reversal. There may be a couple of indicators that showed the possibility of the reversal, but this move has nothing to do with technical analysis. It is a pure fundamental move. Technical analysis does not tell us how traders will react to the fundamentals of the market. They never have and they never will. Tops and bottoms in the financial markets are determined by the fundamentals while technical analysis shows us how we get between those two points. Let my repeat that….tops and bottoms are determined by the fundamentals of the market and not the technicals. Instead of looking at a number of technical indicators to determine the end of a trend, you would be better off checking the economic calendar available at www.dailyfx.com. Big events that result in a change in the interest rate environment or monetary policy are what will change trends, not the fact that the RSI is overbought or oversold. This explains why traders who use both styles of analysis usually have better trading results than those who concentrate on just one aspect. You don’t have to understand why the market is moving the way it is, but knowing that traders are concerned about an upcoming economic release or another event like the G7 meeting can explain current market movement. But we won’t know the extent of the reversal until we know more about the results of G7 meeting and how traders interpret those results.