Editor’s Note: Andy and his right-hand man, Imre Gams, sat down recently to talk about the top factors that go into their trading decisions. This is foundational stuff for traders, so you’ll want to read their conversation closely…

Imre Gams: Andy, let’s talk about how we analyze the markets. We start with the fundamentals and the overall market sentiment. And I think this is how you first learned to trade. Is that right?

Andy Krieger: Honestly, I’m not sure how I first learned to trade, because I didn’t have charts. My knowledge was very academic in terms of what I’d studied in my MBA program. I knew options theory very well. But I had no idea how to trade spot or futures or other markets.

I was trying to put my finger on the pulse of the market to determine what was coming next. It was very short-term, initially. Later, it evolved into much more of a fundamental top-down approach.

Imre: I like how you phrased that – putting your finger on the pulse of the market. Today we’ll look at just how we do that to get a sense of what people around the world are thinking.

When it comes to the global markets – and currency markets in particular, which is our main focus in our Big Trades advisory – we’re really plugging into the information flow of the entire world.

By contrast, when you trade American stocks, for example – shares of Apple, Google, and so on – you compete against mostly players in North America.

But with currency markets, the field opens up considerably. Now we have to contend with different cultures, different ways of thinking, different world views, different politics.

And that makes trading foreign exchange, or forex, so much more interesting. It also makes it potentially more challenging. But, of course, the other side of challenge is reward.

To make sense of it all, in currency trading, we use sentiment analysis. When I think of sentiment analysis and how to assess what the market is feeling, I look at two broad spheres. I look at “risk-on” and “risk-off.” In other words, is the market feeling bullish or bearish?

That’s a very simple binary assessment to make. And depending on which side of the fence the market is largely positioned on – bulls or bears – we’re going to see certain assets outperform and certain assets underperform. Andy, do you have a slightly different take on this?

Andy: Well, not so much different. Just a little more expansive. When I analyze a currency pair and where it’s going next, I look at everything – from the political situation in the country, to the monetary policy of the central bank, to the growth rates in the economy, to the demographics, and so on.

I look at all these things in both countries of the currency pair. I don’t think I’ve ever taken a trade in a currency without first looking at everything from stock markets to bond markets to relative interest rates. All these things go into my equation.

Then I try to figure out what’s priced into the market. In other words, what does the market expect? Does the market expect certain types of data? Does the market expect certain growth rates? Does it expect certain outcomes in elections?

All of these things go into a kind of amorphous kitchen sink, where everything is mixed in and tossed around. But if I know what’s expected, I get important information… because when economic or political data are released, I can watch the market’s reaction. That reaction tells me a lot about how the market is positioned.

Once I have that information, I can study the technical factors, which give me still more information. So it’s a multi-tiered, complex process. As you said, Imre, it’s challenging but very rewarding when you get it right.

Imre: That sounds intimidating at first glance. But what I really like about our process is that, when we look at the markets, we fall into a rhythm. That leads to a discussion. And that eventually leads to either consensus-building, or we might disagree with each other. If we disagree, we can examine where that disagreement lies.

One of the other things I look at to assess the overall risk environment is this: What are the current themes driving the market? Which themes are playing in the media? What are the hosts on CNBC talking about today? What’s in the papers?

Of course, what the media talks about is not necessarily a shock to the market. But it is what a lot of people pay attention to, so it can help drive some of the trends.

For a while, one of the biggest examples was the trade tensions between the U.S. and China. Whenever those trade tensions came to the forefront, we saw market volatility.

If negotiations seemed to be going poorly, we saw a sell-off, and the market shifted to “risk-off” mode. If the negotiations seemed to be going well, the market shifted to “risk-on.”

But that’s a small piece of it. As you mentioned, Andy, we also look at the general stock market. How are people feeling about stocks? And we also look at bonds.

When it comes to bond yields specifically, we like to look at the 10-year bond yield. The 10-year tells us a lot about how investors are positioned in the bond market.

We also look at certain commodities that tend to diverge from one another depending on whether the environment is risk-on or risk-off.

For example, we look at the price of gold and crude oil. A lot of people think of gold as a safe-haven asset. So when the market is in a risk-off mood, investors tend to buy gold. On the flip side of that, they tend to sell crude oil.

The same thinking applies to the currency markets. In a risk-off environment, the Japanese yen and Swiss franc tend to go up, as does the dollar.

In short, there are certain assets that perform very differently depending on the risk environment. And we take that into consideration in our analysis as well.

Andy: This type of analysis is so important. If you sit back and analyze why certain outcomes have certain effects, you can learn so much.

That’s not to say we expect our readers to start poring over reams of economic data and statistics and so on. But we do think that everyone owes it to themselves to at least understand the big picture.

What do I mean by that? Know relative growth rates, have a good sense of interest rates – short-term and maybe 10-year rates – and start getting a feel for this kind of data.

Imre: Exactly. Thanks for your time today, Andy.

Andy: Thank you.

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