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We have a quick question here from Mark, who asks how we can determine the strength of any particular sentiment in the market. Thanks for the great question, Mark.
I think there’s essentially two ways we can go about this to know the strength of a particular sentiment. The first one is probably the easiest one. Is just to have a look at how the prices react and what the price action’s did after the significant sentiment shift, and then looking at the significance of a particular catalyst that is driving the sentiment.
So, starting with the first one, you know, the very first place we want to look, to look at when we want to determine the strength of a particular sentiment is by looking at the way prices reacted after it. So, if we take something like risk sentiment, as an example, we might be seeing that, you know, equity markets are trading red across the board and bond markets might be up. Risk sensitive commodities like oil and copper might be down. High baiters might be lower. Safe havens might be supported.
Now, all of that information would lead us to a conclusion that we are in a risk-off environment, and that would be great. Now, even though those correlations and moves do point to risk-off sentiment, the sentiment might be very weak if the size of the moves across asset classes are really, really small. So, you know, equities, for example, they might be all red across the board on the day, but they might only be down with a very small margin.
So, you know, if equities are all down with just zero, negative zero spot zero 1%, for example, it would be down technically. But it’s not really moving down very convincingly, if that makes sense. Now, imagine that we have the exact same setup we just mentioned, but we see that high-baiter currencies have already fallen, you know, close to 60, 100 pips on the day. Equity markets are down by over one and 2% across the board. You know, bond yields are up, sorry, down. Bond prices are going up, we can see oil and copper are just tanking. If we see that, that is gonna be a much stronger sign of the strength of the overall risk-off sentiment.
Now, apart from the price action, as we said, we also need to consider the significance of the catalyst that is driving that sentiment. So, let’s use the same example that we just mentioned. If the markets are risk off, but there is nothing that is driving the move in the form of fresh, fundamental catalyst or newsflow, then even though the moves might be strong, you know, the sentiment might still be considered as weak if there’s no clear catalyst that is driving those moves.
Likewise, you know, a sentiment might be very significant from a fundamental point of view, but we don’t see the market responding to it in terms of price action. And that can mean one of three things, right? So either the news is not really as significant as we thought, as we thought it was, which would mean that we need to reevaluate our buyers and our analysis on that particular instrument, or secondly, it can mean that the market is basically just discounting the info for another specific reason, and if that is the case, we need to find out what that is.
And the third one, it might be the case that the market has not fully digested the significance of that info and still needs to react to the price, which obviously can give you a great opportunity to sell or buy at a greater level or at a better level.
So, you know, sometimes the market doesn’t price things immediately. It can take a while to digest it and then, all at once you know, you see it responding massively towards a specific situation. I’ve seen this happen time and time again, you know, where there’s a very big announcement and the market moves down or up quickly, and then starts to retrace almost the entire move, you know.
If you know that the event was very significant, then those type of pullbacks can offer some excellent value selling and value buying opportunities, because you know that there’s no reason for that instrument to be pulling back the way it’s doing. Of course, that’ll come with more experience. You know, watching how the market reacts and asking, always asking yourself what has changed.
You know, when the sentiment shift happened, what has changed in the market? Is this significant, has anything changed? If it hasn’t, you know, then stick to it. Or if it has, then obviously reposition yourself.
So, Mark, I hope that helps with the question. Please let us know if you have any more as well.