“Thin slicing” forex trading analysis

Author: Sam Eder | Category: Education

When you use fundamental analysis in your trading, it can be tricky to know what to look for.

After all, there is a wealth of economic data released each week, and plenty of analysis available. This can make it difficult for the time poor, part-time trader to keep abreast of the information they need to make good trading decisions.

But the good news is that not all data points need to be followed, nor all research read, in order to have a tradable market model.

Instead, we can practice "thin slicing" in our approach to Forex trading analysis.

What is "thin slicing"?

While not the first to use the term, thin slicing was popularised in Malcolm Gladwell's Blink.

Thin slicing is the ability to infer patterns and make decisions from small "slices" of information. For example, marital expert John Gottman could predict within an hour of observing a couple if they would be together 15 years later with a 95% accuracy rate.

In trading, thin slicing is useful since we often have to make quick decisions about uncertain events, based on probabilities. A deep study is not always practical, nor does it always increase the likelihood of us getting the direction right, or having a winning trade.

Thin slicing allows the trader to maximize their performance for the time spent, and is a very useful tool for the professional or semi-professional alike.

Let's look at what information we may want to "thin slice".

Key market drivers

When first assessing a pair, it's important to know the key market drivers. I am not necessarily talking about something specific to a currency, but the key thing that the market is focusing on - whether it's falling oil prices, a debt crisis in Greece, or the UK leaving the European union.

These types of events are going to have implications for all currencies, not just the "home" currency.

To get this information, simply look at the headlines on Bloomberg, or any number of Forex reports will give you a summary.

The golden age of the central banker

In this day and age, central banks dominate the investment landscape.

The omnipotent central bank chairperson has the power to move markets with a single uttered word. When thin slicing, this of course means we need to keep our eyes peeled for shifts in central bank sentiment.

We don't need to study meeting notes; all we need to know is one thing - rates. Is the Central Bank:

·In an easing cycle? (lowering interest rates/engaging in QE)

·In a tightening cycle? (raising interest rates/restricting business activity)

·On hold? (comfortable with rates where they are for now)

With this information, we can get a good idea of what currency pairs are going to come under pressure.

Know the market type

Price is an important indicator in and of itself. Experienced traders know that price will often lead the fundamental story.

To find out what price is telling you, quickly assess whether the market is bullish, bearish or sideways, and whether it is quiet, normal or volatile by looking at a chart.

With this information, you can then employ the correct approach for the current market type. Simple but effective.

Is the economy doing well?

Economic performance, before the golden age of the central banker, used to dictate a great deal of currency moves.

It used to be that when you traded currency pairs, you were trading one economy vs. the other. Now it is less so.

In saying that, it is still good to have an idea of how well an economy is performing. This does not mean watching every economic report, but just having a sense of how things are going in the economy. This is easily done by reading one or two bank reports a week.

Thin Slicing individual currencies

Once we know the main kinds of stories that drive markets, we can then zero in on specific economies and look at what's going on behind the helm.

Generally speaking, we're interested in what central banks are doing, how economies are performing, and current market types.

There are always other factors at play, some of which will be more specific to the currencies they affect: below are some of the current key drivers of the major currency pairs. This could include geopolitical factors, related markets or whether stocks are being brought or sold.

The Euro (EUR)

·Brexit and anti-EU sentiment

·Italian banks

·Debt problems in the peripheral nations

·Immigration

USD

·Upcoming election

·Risk on/risk off in stock markets

·Non-farm payrolls

JPY

·Government debt/monetization

·Risk on/risk off in stock markets

GBP

·Brexit Implications

AUD

·China debt/economic performance

·Iron Ore prices

·Gold prices

·Copper prices

·Risk on/risk off in stocks

NZD

·Dairy prices

·China debt/economic performance

·Risk on/risk off in stocks

CHF

·Risk on/risk off in stocks (safe haven status)

·The price of the EURCHF

CAD

·Oil prices

·Risk on/risk off in stocks

Generally, this is what is on my mind when assessing if I want to buy or sell a currency. Notice how important political issues can be throughout Europe, how important commodity prices can be throughout Oceania, and how important risk appetite can be when it comes to USD, CHF and JPY.

Simply use logic

Once you have a clear picture of what is going on, it is simply a matter of using logic. If things look bearish, then usually they are going to be bearish.If they look bullish, then usually they are going to be.

Yes - it can be subtler than that on occasion, so it does take practice. You are not always going to be right. But in general: up is up, and down is down (and we have risk management rules for when we get it wrong).

If you work to keep abreast of what is relevant, make logical calls, and have the courage to trade them, then you will be alright.

Want to learn more? Get free access to the Advanced Forex Course for Smart Traders

Cheers,

Sam

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of FX Renew, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial).