You want to call these order flow generator sheets, or scenario sheets. It doesn’t matter, so long as you understand them. You can form these scenario sheets for anything that you want to trade. You can form bullish and bearish scenarios for any type of financial instrument. You can make these for currencies, for stocks, for bonds, for corn futures, etc. The possibilities are endless.
I learned a while back that you always want to think in terms of scenarios in the market.
You should write down all the different scenarios that can cause an explosion of volatility in the financial instrument that you are trading.
The list can grow to be very large, however there is a secret. The secret is that, you can focus on the closest bullish and bearish scenarios to the current market moment.
Once you focus on playing out scenarios from the current moment, you have a starting point. This starting point allows you to focus in on only the most relevant 1-5 key elements / drivers/scenarios that can move the market at any given moment in time. A market cannot be focusing on 40 different order flow generators at the same time. It is virtually impossible.
Why is that so?
Because human beings can’t even focus on 40 different things!
If human beings cannot focus on 40 different things at the same time, then, since the markets are made up of human beings, they also cannot generate order flow based on 40 different things at the same time.
Human beings love to focus in on the 1-5 key elements at any given moment in time. If you can isolate such key elements of the market action, then you have an interpretation advantage, which leads to enduring and scalable inefficiencies, which leads to a trading edge for life.
With that said, lets go to the
S&P 500 Scenarios:
1. Another round of Quantitative Easing
2. Higher Gross Domestic Product (GDP). This can come in the form of higher GDP, more job growth, manufacturing and services PMI’s, etc. Anything that the market believes will lead to higher economic growth.
3. Better European Growth
4. Better Chinese Growth
5. Better Global Growth
6. Weaker Dollar
7. Interest Rate Cuts
8. Reversal of fiscal cliff uncertainty
9. Reversal of debt ceiling uncertainty
1. Removal of Quantitative Easing
2. Lower GDP
3. Lower European Growth
4. Lower Chinese Growth
5. Lower Global Growth
6. Stronger Dollar
7. Interest rate hikes
8. Fiscal cliff / tax hikes / dividend hike / spending cuts
9. Uncertainty over debt ceiling
These are not the only scenarios that exist. There are other ones. You can add your own, or start your own list from scratch.
I think it is important to search for your own truth to the market. The above are what I believe are true about the market. You may find your own unique perception of market truth.
Remember you always want to base your trades on a scenario. Even if I am fading a stop loss level, or going with a breakout, or placing almost any type of trade, I want to have crystal clarity on what scenarios can make the trade go in my favor, and what scenarios can make the trade go against me. I always want to know what expectation re adjustment and macro repricing I am betting on. Always.
That helps to cut down on the losing trades, increase profits on the winning trades, increase your maximum opportunity set as well overall make you a happier trader in my opinion.