How To Trade Market Sentiment
Just a quick question here from Mark, asking us is there a higher probability strategy for trading market sentiment.
Mark, first of all, thanks for the question.
Now, for the purpose of answering the question, I will divide the question into two parts, firstly talking about, let’s say, probability, and then we can also talk about conviction.
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So firstly, the highest probability strategy to use in trading sentiment, whether that is for day trading or swing trading, is always making sure that you are pairing a strong currency against a weak currency.
So, always make sure that you’re pairing a currency that is strong and expected to stay strong against a weak currency that is expected to remain weak. And that is always going to be your highest probability strategy to use.
Now, even though that is the highest probability strategy, the conviction of a particular sentiment is also a very important factor in consideration. The reasons for expecting that currency to be strong and another one to be weak is very important. If the sentiment that is causing the divergence between those two currencies are strong, that increases the conviction and the outcome of the trade.
But if the sentiment that’s causing the divergence isn’t really strong, that really reduces the conviction and the outcome of that particular trade idea. Now, let’s take today as a good example. In today’s session, we have an upside buyers in the Australian dollar versus the US dollar due to a risk on tone in the market. But the conviction and the risk tone is low today, due to it only being based on better than expected Chinese data.
We also have that overall negative backdrop, still due to the coronavirus, that hasn’t gone away. We were still seeing cross-asset volatility, even though it has come down quite a lot from the peak. It is still elevated.
So, in today’s session, the highest probability is an upside bias for the Australian dollar versus the US dollar, while the risk tone remains positive. But the conviction is low, as the risk tone isn’t very strong, with lots of moving parts in the mix, as well as things like earnings for the US stocks being released later in today’s session as well.
Thus, even though some days will offer us a high probability trade, as in the Aussie dollar versus the US dollar today, it might not mean that there is a high conviction in that particular trade, with today being a very good example. So, looking at today as an example, yes, we’re seeing a risk-on tone right now, in terms of the equity moves.
But we haven’t seen a follow-through for that in the commodity space. Usually we would expect commodities to also move up in a risk-on tone, but oil prices has remained subdued, copper prices has been moving down.
And if we just take a very quick look at the overall currency strength, we can see that we’re continuously losing strength in the Aussie, the CAD, the KIWI. And those are the particular currencies that we would expect to remain strong in a very strong risk-on tone.
The probability is it’s a high probability expecting upside, but the conviction is lower, because we’re not seeing a very strong risk-on tone in the market.
So, the very base trading opportunities, Mark, are when we have a very strong sentiment driving one currency higher, and a very strong sentiment driving another currency lower. And that’ll offer us both a high probability, but also, very importantly, a high conviction for the outcome in that particular trade.
So, Mark, I hope that helps. If there is any other questions, please don’t hesitate to let us know.