Awesome stuff, just finishing the primer part.
I am reading a lot about risk on off changing and correlation being less reliable Than the last 5 years. Is this a pure example of shifting sensitivities you talk about. So recording these type of articles would be useful as we start to see possibly less correlation.
I think I now understand what you mean by the markets change and focus on what they want to. It’s not fundamental analysis because those usually advocate what they think should happen. As order flow traders is it our job to not look at the changing events, but rather how they effect the market time and time again. This way we can see what’s driving ordeflow?
The recent shifts in the importance or relationship with risk on off is a current example, seems to be shifting.
I am sure there are a lot of academic papers and studies and research released by banks, etc with all the fancy graphs, etc showing off risk on/off and the relationship to the financial markets. Some of them are very good as well. However, when I was reading such things years ago, I was looking for the missing link. The link that would help me to understand the information flow. The link that would help me to formulate some level of consistent, rational analysis every day. And I found that in the techniques I have written about in the mastery course. With the news impact releases, market sensitivity principles, scenario analysis, expectations, etc, that is the way I found that made sense to me.
I use those techniques along with my daily habits to “detect” a shift in sensitivity / scenarios. For example, sometimes a currency pair be sensitive to interest rate changes, other times due to a different global macro environment of low interest rates, they might be sensitive to changes in the amount of QE.
Sometimes gold rises due to the safe haven bid story being in play at a particular market moment. Other times it can fall in another type of macro environment as money starts shifting away from Gold into growth sensitive assets if inflation is still low.
I want to be able to detect what the market is sensitive to, what scenarios have caused movement in the past, and what cause volatility in the future.
There are so many different scenarios and stories that the market can latch on to. I include them in my order flow generators / scenario sheets. I tried to list as many as I could. Then I pay attention, using my daily habits, to how the market responds to news, economics, key official phrases, and make informed decisions to anticipate the near future macro environment. That helps me to isolate the 1-5 key reasons why the currency pair / financial instrument will make its move. There are general things that can cause movement such as profit taking / long liquidation, short covering, stops being tripped, etc, but I much prefer to always bet on some sort of macro scenario, as that tends to result in cleaner moves. For example the JPY depreciation or the GBP depreciation over the past few weeks and months had a heavy element of macro repricing of expectations, so the volatility moves tend to be cleaner.
Perceptions, themes / stories, expectations, sentiment, scenarios drive the markets. Fundamentals can play a role, but the markets are just a bunch of prices. These prices move up and down. If you can identify the real reason why the prices moved in the past and more importantly, why the price will move in the future, then you will have a very big edge.
I am interested in what makes the price move as best as I can see the truth. I don’t care what makes the price move. Whatever moves the price – to cause the ODVE, MDMM, GM moves, etc, then I want to know about it. Luckily I have discovered that there is a remarkable consistent pattern as to what causes the volatility moves most of the time in the history of the markets. I call it the news/sentiment/fundamental/macro order flow. Sometimes fundamentals can move the market, and when they do, then I want to be in tune with that and trade based on that. But if something else causes the market to move such as shifting expectations, or macro, or news, or stops, etc, then I want to make sure I am in harmony with that which will move the market.
For example, in the year 2008, a lot of people saw their stocks go down. They may have thought the “fundamental value” was higher, but the market price was the market price. The stocks can go down and form volatility moves that may not equate to the fundamental value as perceived by a person or small group of people. Now the value may recover over several years, but that is a long time to hold through painful drawdowns. Some people specialize in that, such as Warren Buffett, but most speculators do not want to be holding really huge positions that are underwater for months or years and causes big % losses. So if you want to be more nimble and take advantage of the many different types of inefficiencies then you need to know what makes the market move.