Talking Points:

  • Value refers to finding deeper and underappreciated opportunity in a market or asset
  • Looking too far into the future to find the obscure or falling in with a saturated trend yields a similar lack of value
  • As with highlighting temporary corrections to longer-term technical trends, fundamental trades should align to deep value

See how retail traders are positioning in EUR/USD, AUD/USD and other Dollar-based majors using the DailyFX speculative positioning data on the sentiment page.

Speculative navigation of the market often means turning down the focus on time frame and shifting away from an emphasis on big picture fundamental themes. However, that change in objective does not translate into ignorance - much less conflict - with deeper value. That term, value, is often associated with 'investors' whose trade duration is significantly longer than that of the speculator or trader, and who also places greater emphasis on fundamentals rather than technicals. It is true that priorities shift between these two different classes of market participant, but both benefit when they align to deeper and lasting currents in the market.

There are two extremes in the thinking that usually goes into analysis: seek out what no one has realized or jump in on a trend that everyone already believes. To position with the arcane is to take a very risky position in an unproven and ultimately unlikely scenario. Coming to a believe before the vast majority of the market takes exceptional skill and not a little luck. When we look that far afield, a number of factors usually have to align in order to make that unexpected event come to fruition. It is more likely that it is never met than it is realized. It is generally not a good trade strategy to pursue low probability scenarios. On the opposite end of the spectrum, positioning with a very familiar scenario may improve your chances of being in the right side of a trade but such assurances usually comes at the loss of most if not all of the potential returns. Following the herd in a saturated position is just as fraught as trying to 'outsmart' the masses.

Looking for value means finding a happy median between the two aforementioned extreme. We should seek out exposure that is likely to see forecasts come to pass but would still render reward for taking that stance. This seems straightforward for the long-haul investor, but the same is true of the shorter-term trade. To position against a prevailing trend - even for a short period - is to try fight natural progression. Similar to the technical traders mentality, there is little wisdom in attempting to pick tops and bottoms. We instead bolster our probabilities when we look to take position in temporary corrections to the prevailing trend which we can jump on when the opportunity arises. A great illustration of positioning with an underlying trend that is still not fully devoid of premium was going long Dollar back in 2014. A bull trend started to arise when it was clear that the US central bank was gearing up for an early effort to tighten the policy reins - but well before they actually pulled the trigger on the fist hike. The Euro may be our modern day version of this balance between probability and potential with a view of value. We discuss this concept more closely in today's Strategy Video.

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