Your course is outstanding and I thought DS, book was all there was to it (still a good book, and Dameon is truely a smart dude!) But you take it to the next level. lol……. Its funny how stop hunting etc is only a fraction of how I see the market now. AMAZING!
Just wanted to say thanks, and give a quick example of how I now process thoughts from a orderflow prespective. **PLEASE CORRECT ME IF IM WAY OFF**
I am starting to get scenarios flowing through my head even only been a short while,Its quite exciting. I just have to learn that you cant ALWAYS find a catalyst for every single move. So instead I focus on scenarios that have a track record of moving price. I have a huge journey ahead, but its something I really enjoy.
This is how I now see scenarios, and what I have taken from your course:
An example Is what is being priced in now?. How is the market responding to data out of the a specific country, is better than expected data having impact, is bearish data having any impact (sentiments before and after data gets released). I find this really helps me understand if the data alone is the catalyst, or is the market is sensitive because its looking for good or bad news which is in line with current sentiment! So many variables.
Recently I was having issues understanding how a possible ECB rate cut (in near future) could be bullish for euro equities as reported recently (day ago). I had this static view that
a) If ECB cut rates, they must be doing this because of growth concerns etc. So this should be creating a risk adverse environment, money should be moving from EURO and high risk assests into US or YEN safe haven.
The above could be one scenario. however, I shouldnt just be assuming a ECB cut is automatically going to create a risk off day/week/month whatever with money being pulled from euro, equities, higher yielding assets and moving to the US or YEN because of the Safe Haven Bid!. I cannot look at one piece of data by itself and out of the context of the whole market which is a DYNAMIC beast.
After some thinking instead of scenario a) I now view it as;
b) If a rate cut was to occur, the EUR may lower. However, because the deposit bank rate would be negative, this may stimulate Euro stocks etc because no incentive to keep money in bank, as well as cheaper borrowing thus potential stimulation. This coupled with other equities markets having positive days at the time(at the time I was researching yesterday/day before), leads to me understanding how a ECB cut, coupled with current risk appetite for equities may actually be bullish for euro stocks, and the ECB cut itself may not be seen by particpants as enough to change the tide and because of how they are feeling towards equities could be seen as a reason to get in (instead of bank deposits etc).
I recall in your course you mentioned how data can be interpreted different ways This makes me think with secanrio analysis/correlations/sensitivities, that:
A PIECE OF NEWS/DATA/RUMOR DOES NOT ALWAYS HAVE TO BE BULLISH OR BEARISH. THE MARKETS SENTIMENT AND SENSITIVITY MEAN INFORMATION COULD BE INTERPRETED MULTIPLE WAYS, WHICH MAY ALSO BE A DIRECT BIAS OF THE CURRENT MARKET MOOD
Take the above example, potential ECB cut. If there was major concerns globally, the data and potential ECB cut may be seen as a catalyst for equities and higher risk assets to plunge. But If these markets are performing well and nothing will spoil there mood, perhaps many may see a cut as a scenario that this may stimulate growth and people will start to take money out of banks and start, spending ,borrowing and purchasing equities.
I will have to wait and see. Of course expectaions may have changed since yesterday, or a few days ago ( Ihave not completed my habbits for today) The correlation sheet you have is also really helpful to look for anomalies, or as a reason to dig deeper. I dont currently look for a trade based on any ineffeciency between known corrrelations because there may be any number of reasons they exist or break down.
Every trader will develop their own feel for the market, their own unique habits and quirks, their own interpretation of the information flow, macro and scenarios. Developing your own unique talent and feel, is where the trading edges come from that last a lifetime. I will of course give you my perspective on things.
The reasons for the ECB rate cut are because growth was still sluggish, and in some cases, the numbers kept on deteriorating, or still showing weakness or soft conditions in Germany. Germany and France were considered the two economies that were last to be effected, and if their data starts to get weaker, that would entice the ECB to cut rates since they represent key pillars of the Eurozone. But that wasn’t the only consideration. The ECB’s primary stated and only mandate is price stability. And over the last month or two the inflation numbers kept on going down. German WPI was lower, EZ CPI came out at 1.2% instead of 1.6% forecast, etc. a 1.2% inflation rate is going a tad bit to the low side. The ECB wants to keep it around 2% over the medium term. So the lower inflation allowed them to cut rates to help bring inflation back to 2% over the medium term. So the weaker growth, but also weaker inflation numbers allowed them to cut rates.
As far as the EZ rate cut being bullish for equities, it is possible. But I would consider the rise in equities to be happening around the world. Equities are in a big macro move right now as the FED is still going max QE, Japan is going max QE, the S&P was shrugging off bad econ data and wasn’t dropping too much. There were a lot of bargain hunters waiting to buy on dips. The market is ignoring weak data out of Europe. So the big bullish move in European Equity markets I would say is more indicative of the global macro environment around the world, rather than any EZ specific policies. Although it is possible that if the interest rates gets lowered, that could encourage more capital to flow into equities as you said in the email. If they go negative interest rates, people could continue to switch their money into equities.
As for the Forex impact, it is a clash of two big macro scenarios and it is causing choppiness in the EUR/USD. You have the EZ data being weaker, lower inflation, and ECB cutting rates causing the EUR/USD to make ODVE to the downside. But this isn’t enough to cause a big global macro move because there is a bullish EUR/USD scenario in the case of risk appetite, and the FED still engaging in massive QE debasing the dollar. So those two macro scenarios are clashing and it is causing choppiness in the EUR/USD. The EUR/USD is only able to make ODVE, then the move fizzles out. Trying to play for a MDMM or GM move seems too much of a stretch at the moment.
Yes, data can be interpreted in different ways. For example, there was a bullish NFP report last Friday, May 3, 2013. The S&P roared higher on it because there were some macro sellers and profit takers that were concerned a bit about the slow US econ, but when the NFP surprised to the upside, those macro sellers took away their offers and became buyers. However, there exists other days and market environments, where any good US news can be construed as the FED may start reducing QE, which would cause choppiness in the S&P or cause it to go down. That didn’t happen last Friday because the market still believes that even with the 165k NFP, the FED is still going to max QE for a while.
As you said, an interest rate cut sometimes can be perceived that problems are brewing and that could cause risk aversion and equities to fall. Other times, a rate cut can be considered risk appetite as cheaper borrowing costs can fuel the rise in Equities.
In the current EZ environment, most of the spending and shifting of the capital will mostly occur in Germany and France. The other peripheral EZ countries with such high unemployment rates, etc don’t really have much of a population that benefits from the lower rates and they don’t own any equities, etc. The interest rate cut transmission mechanism is impaired in those countries. A very large portion of the population in the periphery countries is not feeling the benefits of the lower ECB interest rates. A significant portion of the people in the peripheral countries are just trying to survive and seeing their skills eroded when they are out of the workforce for such a long time. Also, lowering the rate from 0.75% to 0.50% isn’t going to do all that much. Rates have already been so low for so long.
That being said, the markets don’t care about the plight of the unemployed in Spain, Italy, Greece, etc. If the news/sent/fund/macro forces are positioned for a bull market in equities, then the market is going to push the European Indices and stocks upward. They are going to try to be forward looking and see the light at the end of the tunnel and potential growth in the future from the current subdued levels.
In some cases, when interest rates get around 1% or so, lowering them even further can be seen as counterproductive by some central banks. For example, the Bank of England was considering lowering interest rates down from the 0.50% level, but they kind of concluded that perhaps it would be counterproductive.
Take for example, the situation in Australia. The RBA slashed interest rates from 3.50% to 3.00% from September 4, 2012 to December 3, 2012. Those interest rate cuts can actually do something to help support the underlying economy, since the high interest rates may have been constraining some spending or lending. The RBA slashing rates from 3.50% to 3.00% probably did a lot more to stimulate economic activity than take for example another central bank slashing rates from 1.00% to 0.50%. I am talking now from an economic point of view and not a trading or order flow point of view. Whether that showed up in the price volatility, through more bullishness in the Australian equities I am not certain.
As a trader I keep my beliefs about economics, monetary and public policy separate from my order flow habits. In most cases I don’t try to think about economics, monetary or public policy too much. If my order flow habits pick up a trade, then I just place it, without regards to whether it is the “right thing” from an economics point of view. I have to focus on how the news/sent/fund/macro market participants that generates the large order flow will perceive the information. That is my job.
For example, I think that there could be a problem down the road with the US economy. There have been low interest rates for 5 years, now, 3 rounds of FED QE, with still more every month, the stock market is hitting all time highs, and the best the NFP can only do is +165k? Unemployment rate is still 7.5%? The US economy needs around 100k new jobs per month just to keep up with population growth! The market was pumped up on all this fiscal spending and easy monetary policy, and the job growth has been very sluggish. I am concerned about how it is going to end. I could play out all sort of different scenarios in my mind. That is my economic mind working. I try to turn that off and just focus on my trading mind because… The market doesn’t care!
My order flow habits were picking up bullish equity signals from the beginning of the year. And the market continued to shrug off bad data, etc. Same thing all last week. If you tried to go against that macro order flow and short equities and throw on any wrong risk aversion trades, at the wrong time, and you could lose a lot of money real fast.
As Colm O’Shea said in Hedge Fund Market Wizards:
As long as no one cares about it, there is no trend.
As long as no one cares, there is no crisis.
And as Paul Tudor Jones once said:
Under, or overvaluation is only part of the battle. The key thing is to be able to time one’s entry into a position at the precise moment when the market is about to move in your favor. Markets can stay undervalued, say for months and years at a time. You don’t want to waste your resources in that kind of position.
Therefore, doing the daily habits, interpreting the right news articles properly, checking the market sensitivity, playing out the scenarios, will all give you a very good feel for situation.