Trading Volatile Markets
We just have a quick question here from Stuart, who asks, with all of the uncertainty in the market right now, and all the moving parts going on, have trading become more like gambling recently?
So, Stuart, this is a fantastic question. And I think this question addresses a very important point regarding conviction, as well as confidence in our trading. Now, it is certainly true that times like this are trickier to navigate, but it is also an extremely valuable time for shortening our learning curve, as there’s so many market dynamics in play right now, that you’re basically exposed to a vast array or micro-fundamentals in a very short space of time.
So it’s a great time for learning to see exactly how different markets correlate to each other, and how the different markets basically affect each other. Especially when we see divergences when we’re not expecting to see them, and just as a quick example now.
Apart form the obvious benefit of shorting the learning curve, a time like this is actually a great time for cementing one of the most important aspects of trading, and that is making sure that you’re always staying on the right side of probability. So what I mean by that is making sure that before you pull the trigger on any trade, have you gone through the current analysis check?
So are you trading, if you’re taking a day trade, for example, did you make sure that you’re pairing the strongest currency against the weakest one? Have you considered the potential risk factors that can change the buyers? So if that thing hits the wires, you know, okay, this is my signal to liquidate or get out. A
re you trading in line with the broader macro-fundamentals? And if you’re not, if it’s just short term, what do you need to be aware of in terms of the bigger picture that can affect that trade?
And the most most most most important point to take from an environment like this is am I trading fresh and clear and no-brainer sentiment shift moves that you know will move the market.
So let’s take a few examples from moves we saw in the last two weeks. Now if I just quickly look back, there’s basically two very clear and tradable opportunities that I traded, which offered both a high conviction as well as a high probability trading opportunity for me personally.
The first one was last week’s German Constitutional court ruling, as it relates back to the Euro. Now, we knew if the court ruled against the APP, let’s just open up that week’s dominant current sentiment report. We knew that if the German Constitutional Court ruled against the APP, it would cause further stress in the Italian debt market, or bond market, and that would be a negative catalyst for the Euro. And just looking at the hawkish sentiment shift, we also considered exactly how we think that should affect the market if the court rules against it.
Now, that event created a couple of great opportunities in something like the Euro versus the US dollar. If you didn’t catch the very first move to the downside, of course, you could have waited for a pull back, and re-engaged the market to the downside. So in one particular day, you could have had two great trading opportunities just from that one event.
We knew it was gonna happen. It was scheduled. We knew what the outcome would be if it came out that particular way.
So a great example of a high conviction, fresh, clear, sentiment shift in the market. The second one was from Wednesday, when we had FHL’s speech. Now the big focus of course was on negative interest rates.
We knew that there was a lot of focus being placed on negative interest rates by the markets, with some markets pricing in the possibility of negative interest rates, in terms of OAS pricing. And we knew that he might be asked about that in his speech, even though he didn’t mention it of course in his opening remarks, we knew that if he’s going to be asked about it later in that speech, and he came and his term comes in explicitly against it, that would be very positive for the dollar. And we knew if he came out having a softer tone with regards to it, that’ll be more a negative for the dollar.
So when the bomb finally dropped, and he said that it’s not something the Fed is looking at. It’s not something, they haven’t changed their mind about it. We knew exactly what reaction it would have on the US dollar. And they were actually a couple of great tradable opportunities resulting from that. We expect the dollar up side, so you could even have traded the dollar itself, if your broker allows that.
Or you could have taken downside trades in the Aussie, in the Euro. Even in the pound as well as the Kiwi. So a couple of great opportunities that you could have paired with the dollar. And that was a very clear sentiment shift, a no-brainer move, so to speak.
So if we have the patience to wait for these type of clear fresh no-brainer sentiment shifts, I would say that trading is definitely not like gambling at all. If we’re just jumping in on any type of sentiment without knowing how it will affect the market, of course, that is starting to lean more towards gambling. The key is having the patience.
Waiting for those events that you know is gonna move the market. You know exactly how it’s gonna move the market. So you’re not caught by surprise, and trying to jump in somewhere at the highs after the move has taken place. You know it as it happened. You know, okay, this is a great opportunity. You’re gonna jump in.
You’re gonna ride it out for a couple of bubs, and then take off your position. Now having said that, traders who during these times, of course, are trading without this type of knowledge, and basically just relying on flashing lights to tell them where to enter and when to close without any knowledge of why the markets are moving, and what to expect.
In my personal opinion, that is definitely leaning towards gambling, especially during a market environment like this.
But if we know what’s coming up, if we know how it’s supposed to move the markets, then I think there’s still great tradable opportunities in there. We just need to have the patience to wait for them, and execute them according to our process.