Well after much tweaking, I think I now have repeatable daily habits for me as a casual trader. In addition to what I emailed a while ago I have made the decision to only focus on one instrument and because I am in Aus I have found that I can have some opportunities with cable. Although of course I may only get a trade or two a month it does not bother me.
Even though I only trade cable, I understand the importance of reviewing all articles and news releases (even for other currencies to se if it impacts cable). Since my time is limited I use Bloomberg in the day and only copy and paste a sentence or two for risk on and off assets. (see attached- its rather raw and the news impacts are rather general rather than to the exact pip)) Instead of a master file I keep it all on one sheet and break it up into risk on and risk off, than notes at bottom. I also look through IFR for any major stories I missed (I only do searches by currency or country name). I also keep a separate word doc for every news release but only record those that generate more than 25 pips
Most of my opportunities will have to come from news trading and intra day stops and barriers, however I also look for a possible macro change that may be a multi day or one day explosion. For instance I see the market really focusing on Fed and QE, so who knows even If I miss the initial major moves there is always a chance to get in halfway, if we expect a major move. I do this now by conducting research and look for a similar catalyst in the past where similar sensitivities line up with now, and see how it produced orderflow. (eg: talks of QE related matters and fed comments etc)
It reminds me of my earlier occupation when I finished my criminology degree. I use to identify financial crime threats for organisations and profile offenders based on prior behaviours. We to profile the market and behaviours in certain environments to predict how it should generate order flow (based on sensitivities and sentiment at any given time)
I really enjoyed your economics primer (second time through course) and I understand that we don’t need to be economists however, further knowledge would me with better interpreting what is being said on occasion. Do you know of any good literature on intermarket anlaysis. I know correlations break down but its my understanding in AUD and other risk on currencies, stocks and currency are usually positively correlated. As the country is doing better so do the stocks. Over recent years this relationship has not rung true for USD and Yen with their respected stock markets, due to their safe haven status.
Yes, even if you only focus on one or two instruments, if you apply the same process, you will still get much value out of it and attain a much stronger feel for the news/sent/fund/macro players. I remember reading all sorts of stories in the Market Wizards books and other books about traders who made a fortune just trading one financial instrument over a long period of time. They just did a lot of day trading with it and caught some swing trading moves, etc.
There will be times the market is making amazing swing trading moves, and you can get in late and still have a good reward/risk ratio. Other times, the market can be choppy and only be making one day moves, so that if you miss the ODVE, the market can stall out and reverse (which also presents an opportunity to fade the ODVE). It just depends on the macro forces, and when they want a breather.
I do not know of any good economic literature. I do remember taking a few classes in college, but I think it just confused me more as I couldn’t see the relationship with the way the price was moving. I went through all sorts of pain to figure out the economics link to trading. At times it was unbearable and I thought I would never figure it out and actually wanted to give up. I spent a lot of time searching and searching for the answers.
The general process I went through was:
- I developed my news trading habits – the news impact recording, intraday and swing trading types of trades
- I learned about global macro trading – thinking about the market more in terms of expectations, sentiment, scenarios, hypothesis testing exercise.
I did read large parts of an economics textbook many years ago, but they are in my closet gathering up dust.
The key link for me if I remember correctly, was the news impact recordings, as well as to develop my interpretation advantage. To be able to read an article or book, or have a conversation and know the really important variables and elements. To be able to know what is useful information, and what is useless. I nurtured that skill with my daily habits, and I used that in developing the mastery course with picking out the examples and quotes from various books to weave them together.
I would always ask a lot of questions of everything that I was reading. If I was reading an academic paper, or article or book, I would ask questions about it to myself, and try to figure out the answers. Questions such as: Does this move the market? How can I identify the volatility created? Why aren’t academics traders? What is the difference between an academics textbook, and say a trading book like, The Alchemy of Finance? How can I determine the key elements about what cycle an economy is in? What are the key determinants to inflation? All sorts of questions I was asking about the material I read.
As a general rule, I prefer to avoid too many academic articles or literature. What I prefer is literature that has some price charts on it and uses some sort of macro analysis. What books meet this criteria? Books such as The Alchemy of Finance, Inside the House of Money, The Invisible Hands. Those were extremely helpful in developing my knowledge of economics and macro. Although, the first time I read them, they were very difficult to understand. I had to develop the right principles, such as the ones shown in the mastery course, before I was able to understand them. Even now, I don’t understand 100% of those books. And that is the wonderful thing – you don’t have to. You can do very well for yourself, even if you only understand the 5-20% that matters. The key information and elements that are important.
I have read tens of thousands of articles, central bank speeches, etc, over the past years, so I do have a lot of information rattling around in my brain.
For example, for the key determinants to inflation, I can instantly come up with a few different variables including:
- The exchange rate
- CPI, PPI
- Energy Costs
- Food Costs
- Labor costs
- Capacity Utilization (do the factories and plants have spare capacity?)
- Inflation expectations of the population and businesses
- Certain types of taxes on purchased goods, such as VAT tax, or sales tax, etc.
Not all of them are important always, etc. So I have a pretty good understanding of how the different variables can come into play. I don’t sit there digging into massive economic statistics and do financial modeling, etc. I leave that to the economics and academics, and financial engineers.
What I do, is I try to find the impact on the financial markets. What will cause the price to move. To have some volatility.
So with the inflation factors, you start playing out scenarios in your mind.
You start to say, Japan has been in deflation for a long time and they have been struggling to get out of it. A central bank doesn’t like deflation, so will they do anything about it?
What if Japan stays in deflation even with all the monetary easing? What will the authorities do?
What if the Swiss France appreciates too much and causes deflation in Switzerland, will the SNB do anything? What if inflation starts going up in Switzerland, at what point will the SNB choose to remove the 1.20 floor, or take other actions? Or will they ignore it?
What if inflation is rising in a country due to some temporary factors associated with a rise in VAT or indirect taxes, will a central bank choose to ignore that temporary hike in inflation? Or will they choose to hike rates, for fear of a wage-price spiral?
What if Crude oil prices are staying contained while the economy is growing? Will that help to boost economic growth as consumers will not have to spend as much on energy costs? How will that effect stock prices, etc?
What if the economy is growing very fast, but food and energy prices are also growing fast? Will that increase in inflation cause consumers to be forced to spend a lot more of their income on food and energy and reduce discretionary spending? How will that impact the economy?
What if inflation continues to stay low in Europe, or goes lower, due to weak economic activity, or lower energy prices, etc? What will the ECB do? Will they go negative deposit rates? Will they institute some type of QE program? Will the European authorities talk down the EUR to try to stimulate growth and raise inflation? Or will they do nothing?
What if inflation in the US dropped further from current levels? Would that cause the Fed to stay at 85 bln QE per month for longer? Will it cause them to increase QE by more? Or will they just think it is a temporary drop and continue their bias to taper in the next few months?
What if the Fed tapers? Will that cause the USD to rise by 5% or 10%? Will Crude oil prices drop from the rise in the dollar and from less Fed QE? Will the drop in Crude oil prices and rise in the US dollar, keep a lid on inflation?
I ask all sorts of questions during the day. If a central bank results come out and they didn’t move on rates, I ask why? Why didn’t they hike? Why didn’t they cut? Why didn’t they do QE? What are they waiting for? What are they looking for? What is going through their mind? What do they find important?
So you have all sorts of those questions that you ask of yourself and as you analyze the information flow, you form that into the global macro picture in your mind.
As Bruce Kovner said in Market Wizards:
I assume that the price for a market on any given day is the correct price, then I try to figure out what changes are occurring that will alter that price.
One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong – that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.