Our Investment Approach

My (Sean Hyman) system, called the Forex Diamond Factor, is made up of sentiment, fundamentals, and technicals — and then executed with shrewd risk/money management.

Sentiment — This is simply where I gauge the mood of the market. Is it fear-based or willing to take on risks at the moment?

Once I determine this, I know what road to go down next. For instance, if the market is willing to take on risk again, then I know it will trade off of its fundamentals.

If it’s running off of fear, then it will ignore the fundamentals because the emotional moment will overrule the rational thoughts of fundamentals. During these times, the fundamental trades are exited for the time being, and that will boost the defensive, beaten-down currencies.

The market is likely to be on the defensive when we are experiencing a downturn in stocks and when the economy is in a recession.

Outside of these times, it is more likely that the market will be willing to take upon risk once again and invest in stocks, commodities, and higher-yielding currencies (in other words, the riskier assets that could give the larger returns).

Fundamentals — Many traders WRONGLY think that this means trading news events. Fundamentals are so much more than that.

I watch for the trends in fundamentals to see whether the data for a country is improving overall or declining overall. After all, the trend of the fundamentals ends up producing the technical trends on the charts.

These are some of the most important factors that I look at: interest rates, inflation (CPI), GDP, and employment / jobless rates. These are my “fundamental focal points.” I won’t say they are the ONLY things I look at, but they are the main things I assess regularly. The reason I say this is because things such as geopolitical events can be very important at times, too.

Below I have two examples. One has great fundamentals and the other, horrible ones.

Australia (first chart) has an interest rate of 3 percent, a positive GDP growth rate that never went negative during the global recession, inflation of 1.5 percent, and a jobless rate of 5.8 percent, which is almost half that of the United States.

Then there’s there is the United Kingdom’s economy. It has a paltry interest rate of 0.5 percent, a negative growth rate of -5.5 percent, an inflation rate of 1.6 percent, and a jobless rate of 7.9 percent.

Now, if I were trying to sell you on buying into one of the two countries, which one would you want to buy into? Guess what? The whole rest of the world is thinking what you and I are, too!

Everybody would rather buy the one that can earn more interest, has a positive growth to its economy, has some inflation to support and sustain high interest rates, and has the much lower unemployment rate. That’s the healthier economy.

So it’s no wonder that the U.K.’s currency, the British pound, is falling off the map right now as the Aussie dollar holds up so much better.

Knowing this fundamental backdrop really helps one frame these pairs and takes a ton of guesswork out of what to buy.

Now, although the fundamentals tell you “what” to buy, they aren’t so good at telling you “when” to buy the country’s currency. That’s where technicals come in.

Technicals — This is where the trader learns how to read the charts and detect the trend direction and the health of that trend, along with better times to be entering that trend.

By learning how to read the charts, it helps to put the odds on your side by determining better times to be buying in than others. It isn’t a crystal ball or a holy grail by any means. However, it points the way to better entry points that statistically tend to be lower risk entry points into a trade.

My analysis usually is very simple when it comes to the charts. I tend to use a moving average to detect the overall trend direction (such as a 50-period simple moving average). I also may draw trend lines or support/resistance lines on the chart. You can see an example on the chart below.

Additionally, I usually have some type of timing tool below the chart such as a MACD or Slow Stochastics indicator. These tell me when might be a better time to hop into the trend’s direction.

Aside from this, the other important aspect is to use shrewd money management.

Money Management — This means that I have to determine how much of the account to put at risk at any one time. For me, this will be a maximum of 5 percent.

Therefore, I gauge how volatile the currency pair is at the moment and, with my 5 percent risk parameter in mind, it tells me how many lots I can buy to stay within my risk guidelines.

One thing is for sure. There will be losers. EVERY system has them. So the key is to prepare ourselves mentally and manage the losses as they come. That’s where risk management enters.

These are the vital pieces to my system. It’s very methodical and not based on a whim or a gut feeling. There is no emotion to it. It’s simply a weeding-out process to determine which currencies are the stronger ones to buy and which ones are the weaker ones to sell. Then I pair the stronger currencies vs. the weaker currencies, and I have my pair that I’ll be trading.