We have a quick question here from Abu who asks what can we expects assets to do when there is no clear or fresh catalysts driving price in the short-term, do those assets follow their medium or longer-term fundamental bias or do they follow price action?
Thanks for the question Abu, and the quick answer to the question is that assets usually follow the path of least resistance, and what I mean by that, is that mostly we know the shorter-term movements in price is dictated by the current sentiment of the asset, and of course in the medium to long-term it’s dictated on the macro fundamental bias of the asset.
Now, when there are no short-term catalysts that drive price in a specific area, the price will follow the path of least resistance, and that means either falling back in line with it’s macro bias, or trading in line with common correlations, or at other times trading off of key technical levels, and unfortunately there is no way in knowing which part the market will choose to focus on at any given day, if it was that easy then I suppose many more people would be trading.
Even though we won’t always know what the price will choose to follow, we can of course make sure that our knowledge of that particular asset is on par to know what type of other factors might be influencing the price.
When we look at something like the Aussie Dollar for example, apart from central bank policy, the Aussie is also sensitive to China as its biggest trade partner, so any positive or negative news from China can be a driver, the Aussie Dollar is also sensitive to commodity prices, so any sudden flows with commodities, especially things like iron ore can affect it, other times it might be risk sentiment with equities, other times it might be the US Dollar, and if there are absolutely nothing happening of any type of significance with those common factors then the price might just be dictated by the ebb and flow of the market, which can be quite random at times.
Now what this means for us in trading is twofold. Firstly, from a short-term or intraday perspective it means that we should rather stay away from something when the market doesn’t have a specific reason to be buying or selling that asset or that currency or currency pair. Secondly, from a swing-trading perspective, those type of days when there is seemingly nothing noteworthy driving price, then you don’t really have to worry about that swing position, because if you’re right about the overall direction there is a good chance the market will follow that direction on quieter days like that.
A good example of this was equities during July and August, if we take a look at the S&P500 just as an example, during the summer months we saw thinner liquidity and lower volume as usual, and because the overall bias for equities was titled higher, it didn’t take a lot of catalysts to push equity prices higher, there were some days when equities rallied steadily without any real positive catalysts, because the lack of negative news basically meant that equities simply followed the path of least resistance, which was to the upside.
So, I wish there was more concrete answer I could give you with that Abu but as with many things in trading the answer isn’t just one thing but usually a combination of a couple of variables to keep in mind at any given time, but a good rule to trade by in your trade plan is having the discipline to stick to your plan by only buying or selling something when you think the market will have a reason to do so.
Hope that helps with the question Abu, if there is anything else just let me know.