I’ve spent the last week taking in your advice.
I had composed a reply email last week, but each day I would complete my habits and reread your reply and then completely change the contents of my questions in the composed email!
I must’ve revised this response half a dozen times by now haha
Just as I think I know what I want to ask, you sent an extremely helpful set of currency files. I appreciate it a bunch.
I’m a kind of guy who believes in “work smarter, not harder”. Well, that isn’t to say that I don’t believe in hard work, nor that I don’t have a Type-A, hardworking personality… It’s just as you said, “Work, but work systematically.”
I’ve been trying to find the weak spots in my news reading and analyses and my daily habits for the last week and this is what it boils down to:
I can’t get around what the current environment of each currency is.
When I read the news on Bloomberg, I’m not sure if the market has priced the in specific piece of news or if it’s just influencing sentiment.
I think that’s what’s missing. I believe that if I don’t understand the bigger picture i.e. the market environment, then I can’t understand why certain pieces of info aren’t being priced in or why market participants aren’t focusing on stops and barrier plays for the day.
For example, CPI and PPI numbers for Germany could come out and show economic strength for the Euro, but if a head figure comes out and states, “The Euro is trading too high” beforehand, the numbers could be meaningless…
I want to focus on what will generate order flow, but I feel that I have to discern what the other market participants are looking at and that will in turn determine the current environment of the market.
Only then can I attack.
I’m also working on small things like seeing what moves are worth recording. Some pieces of news seem to have an impact, but the FM bars are weak. The market definitely turns at the news release, but… I’m just second guessing myself a lot about it. That, and trying to see if it’s better to just record the impact on the USD cross of each currency or of all the pairs of each currency. I see in the most recent currency file that you recorded just the AUD/USD for AUD, but all of them for the EUR.
Thanks for all your help thus far!
It is natural to have a lot of questions, and your mind can race from thought to thought as each new trading day arrives, and as you try to understand and implement more trading wisdom, etc. I really tried to condense 5-30 years of trading knowledge into the course. So if you are consuming it within a few weeks, it can feel a bit overwhelming. But in my opinion, better faster uncomfortable progress rather than slow progress.
As for the environment of each currency pair is. You can start off with what the global backdrop is, then start to drill down into specific countries. But then you need to start searching for various catalysts and reasons for price movement. Remember that a financial market cannot be pricing in 30 different economic scenarios that exist on the order flow generators or scenario sheets. They usually are only pricing in 1-5 key elements or variables. And you just need to find those key elements to figure out what is going on and use that to structure a trade.
I like to identify the current market moment, then project out the nearest bullish scenario and nearest bearish scenario.
The way I learned my knowledge is by reading the right articles, interpreting them and categorizing the information in the proper way, doing the news impact releases and currency master files. Linking the expectation adjustment and information flow to a volatility move is crucial. That is what stops a lot of academics in their tracks. They have all these fancy theories about the markets, but they do not know how to link it to a price movement and don’t know how to trade.
The way I see it, the world is in a global growth phase. The U.S. is in an expansion phase. So now the market is trying to figure out how strong is growth going to be? Is the U.S. going to grow at 1.5% a year or 3.0% or some other number. There are many markets that are influenced by changes (or perceived changes) in U.S. growth. Individual stocks, S&P, Crude oil, Bonds, the U.S. dollar, etc. Changes in growth can generate order flow in general. But it is also what the changes in growth cause monetary policy to do. The market is trying to figure out when the Fed is going to end the QE program. Are they going to QE for 6 more months? Or 12 more months? Etc. As expectations shift for that, it causes volatility moves in the market.
Then you can play out the bearish scenario, for what is U.S. growth decelerates, perhaps due to spending cuts or tax hikes, or some other reason. Then you can play out the impact that would have on monetary policy and the markets.
There are other scenarios and macro catalysts independent or somewhat independent of U.S. growth. For examples, there is the inflation catalyst, but the market is not expecting inflation to skyrocket nor does it expect the inflation rate to drop. But if U.S. growth rises rapidly, then that could cause inflation to go up, which would cause the Fed to end QE faster, raise rates, etc. Or growth falters, then inflation can undershoot, then that can cause the Fed to QE for longer, perhaps increase QE, etc, which would impact the markets.
Now you may ask, how do you know what the market is pricing in and what the expectations are of the current moment, etc. Well, that is where the daily interpretation of information flow and news impact releases and sensitivity analysis comes into play. I can see the changes in US growth and if they are affecting the markets by seeing how the various markets react to the GDP, unemployment claims, NFP, retail sales, ISM numbers, etc.
You can perform similar analysis to other countries such as the UK, Australia, Japan, etc. You can figure out where they are in the cycle and what policies they are currently implementing, and what new policies or changes they can make.
For example in Japan, they had a strong JPY for many years and were in deflation for years, but in November of last year, the new Prime Minister was coming in and had enough of it, and thought the strong JPY was causing Japan growth to be held back, so he pushed for more QE, higher inflation target, etc, which all caused the JPY to weaken. If any central bank engages in more QE, or if they adopt a higher inflation target, that will tend to cause the currency to weaken.
Then the QE had an effect in other markets, not just currencies. The Nikkei index staged a huge rally as it benefited from JPY weakness, but also the improvement in global growth after the fiscal cliff compromise and debt ceiling uncertainty.
Also there were a lot of macro sellers with limit orders and market orders capping the S&P topside in the final months of last year. Once the fiscal cliff compromise happened and perceived progress in debt ceiling happened, those macro sellers were removed and they turned into macro buyers to push the equity markets higher. It is the liquidity model and battle of scenarios at work.
I am a big fan of working hard. But a lot of people just work hard all their lives and grow old. You have to work hard, but just working hard is not enough. There are people working really hard, who are still going to be making the same money 20 years from now. In order to make more money, you need to work smart, improve your skills, improve your discipline, know where the opportunities are.
I assure you 95% of the world doesn’t do anything to help themselves have a better life. They don’t want to work past 40 hours a week. They don’t want to read a book. They don’t want to develop new skills. They don’t want to do anything to help themselves. The majority of people still think the markets are a conspiracy. That there is a conspiracy out there to keep them poor, broke or in the middle class.
That is when I figured out that if I just put in the effort, with the right information and strategies and habits of course, then the results will come. I didn’t have the right habits and strategies and mindset when I first started. But now I certainly do. And they can last the rest of your life.