I knew If anyone could provide a answer it would be you. I have taken what you said and recorded it as;
A sent shift related to particpants getting out of USDJPY based on trips being hit and people squezzed out causing a temp sent shift move- this in turn caused fear on other related USD pairings (NO FUNDEMENTAL REASONING- DONT TRADE ANY PSYCH MOVE! UNLESS BACKED BY NEWS/MACRO ORDERFLOW). This seems to be seperate to QE related issues making up current macro landscape.
I only trade Cable, and this example seems to be a exact reason of why I should not only look at cable related (GBPUSD) news, sentiment, stops etc but all related information on different currencies and instruments. Is this a common occurence in related pairings? Meaning should I take notice of reported heavy positioning in all cross (USD) (GBP) pairs.
Also you mentioned how it cascaded onto other USD pairs does this happen because , sent shift in USDJPY is contagious, meaning the fear in this case extended to USD releated pairs, or is it rather another type of reason for the flow on effect.
I just want to make sure there is nothing I have unintentionally missed in the course regarding the anticipation of these type of events.
Well, you can trade a stops being tripped for sent/psych move, if you catch it in the early stages of the move. For example the USD/JPY collapse on June 6, 2013 tripping stops below 98.80 or the EUR/NZD tripping stops above 1.6900 for today Tuesday, June 11, 2013. You just have to acknowledge that you are playing for an intraday move or just a ODVE and plan accordingly by looking for a spot to get out or trail your stop, since the sent/psych moves on the intraday basis, can tend to reverse.
And you just try to take into account some basic reward to risk principles and current vol vs near future volatility principles. So for USD/JPY, you could potentially short it after it breaks out after it consolidates on the intraday charts, but shorting it after it already drops 100-300 pips from the breakout point, may not be good ideas since the intraday move can be over.
When I talk about not trading a move unless backed by the macro order flow, I kind of meant that you should try to avoid the stop cascades. Those are the huge stop runs that can last just a few minutes, etc. The sent/psych shifts can definitely have elements of stop cascades as well, but if the sent/psych shift is spread out over an hour or two, as the USD/JPY collapse on June 6, 2013, was, then there is potential for you to take advantage of it on an intraday basis for the agile trader.
As for whether the GBP/USD moving due to what is going on in USD/JPY factors, is a common occurrence, it just depends on the moment in time. Every currency pair and financial instrument tries its very best to do its own thing. It tries its best to move according to its own news/sent/fund/macro forces. However, there are times when other exogenous factors can come into play.
How do I know when those factors come into play? Simple, I do my daily habits and if something comes up, it goes on my radar screen and in the forefront of my mind.
For example, for today, Tuesday, June 11, 2013, the stock market sold off on disappointment from the BoJ not announcing any additional measures to quell the volatility in the Japanese bond market. So there are many financial markets that are interconnected and can move because of what is going on in Japan now.
Why does this happen?
Well because there are a lot of large money managers and market participants that don’t just trade a single currency pair. They trade the world. So when they run big positions, they can have big positions on in multiple financial instruments across the world. Currently, there is still big money long the Nikkei and Japanese stocks, and these same people can be running large long USD/JPY positions, while also being long a large amount of U.S. stocks, etc. So if something happens in the Japanese market to cause some profit taking there, it can cause people to start to sell USD/JPY or U.S. stocks to raise cash or staunch their losses or reduce their risk profile and reduce their volatility, etc.
Sometimes, the market wants to attack the concentrated positions. And where are the concentrated positions? In markets and currency pairs that have had a big trend – like USD/JPY and the Nikkei, etc. So if the markets reach some sort of macro exhaustion point where the primary scenario gets exhausted, then some people like to liquidate first and ask questions later.
So the market is trying to figure out if the Japanese bond market is going to go down or not. Because if Japanese bonds go down, yields (interest rates) go up, and then Japanese companies may have to pay more money in order to borrow, and that can cause problems in the economic recovery that Abe is trying to engineer. There was a bit of money flowing out of the Japanese bonds because why should they lend money to Japan and get paid 0.50% or 1.00% per year, and taking on the risk of capital gain losses, when they could put that money in the Japanese stock market and make who knows 5%, 10%, 30%, etc, if the stock continue their run higher?
The way I think about whether to concentrate trading on one pair, revolves around the principles of information flow, key scenarios, and maximum opportunity set.
I used to try to analyze trading one currency pair a long time ago. I tried to learn everything I could about it, etc. It was fun for a bit, but then I realized I was trying too hard to find information about that one currency pair. I was scouring the articles and internet for information, etc. And it stupid because I figured out, how in depth could I possibly analyze a situation? I had my own order flow habits to do, and yes there were times I wanted to think about something for 15 minutes, or 30 mins, etc. But I never wanted to sit there for 20 hours a week only analyzing one currency pair. I figured out that I was spending too much time on it and on the irrelevant market information. That is when I switched my focus and I told myself, that I will split up my time between many currency pairs and financial instruments, while only searching for the really important market moving information. I only wanted the information that really mattered.
That shift in philosophy helped me immensely. I focused my time on the information flow that I believed mattered, which helped to hone my market sensitivity and macro skills and interpretation skills. It improved my scenario analysis. And my maximum opportunity set increased since I was analyzing and staying abreast of more pairs and instruments.
The way I think about it, for example, if you only trade GBP/USD and only focus on the GBP/USD specific factors, then lets say you may have 40 maximum opportunity set per year.
If you only focus on trading GBP/USD, while also getting a feel for the factors moving the other currency pairs, your max opportunity set can improve to lets say 60 per year, etc.
And if you decided to trade multiple currency pairs, multiple financial instruments, then your max opportunity set skyrockets to hundreds and thousands per year, as per the lesson: http://orderflowforex.com/where-the-big-money-exists/
That is the way I think about it.
Then you can ask questions and put yourself in some great traders shoes when they first started out. Would George Soros have been able to succeed if he just traded one currency pair? What about Paul Tudor Jones? What about Michael Marcus?
There have been some traders that were wildly successful trading one instrument, but some of them were floor traders from back in the day. I have heard of some traders doing well for themselves in the electronic age, by only trading one instrument and they spend the whole day scalping it, etc.
I guess it just depends what your philosophy is and what type of trader you want to be. I decided that I did not want to be a scalper and place 50-150 trades per day, so I searched for another way and found that I wanted to capture the chunk of the intraday moves, the ODVE, MDMM, and the GM movements. That was just my style.
Some useful quotes that I think may help you:
From the book More Money Than God:
Soros saw no point in knowing everything about a few stocks in the hope of anticipating small moves; the game was to know a little about a lot of things, so that you could spot the places where the big wave might be coming.
From the book The Winning Investment Habits of Warren Buffett and George Soros describing Soros’s style after the futures markets developed more in the late 70’s and early 80’s:
Soros switched his attention to monitoring political, economic, industry, currency, interest rate, and other trends, always on the lookout for linkages between disparate, unfolding events.