Throughout the years I have constantly been searching for new habits to add to my daily regimen as well as tweaking exiting habits. The goal was not always to force myself to spend more time analyzing the markets, but rather to make sure I could figure out what the most important information was, figure out how to interpret it properly, how to display it properly and organize it, and finally act upon it to place profitable trades.
When I first started my daily habits, I only did some labeling of the stops and some option barriers. I would scour IFR, the trading forums, etc for stop loss and option barrier information so that I could place it on my charts. It would take well over thirty minutes per day or even an hour or two. It was a very inefficient way of doing things, but when I first started “order flow trading”, that was the only type of inefficiency I could perceive. I was wasting dozens of hours every weak. I had to discover and develop new habits to replace old, destructive habits that were not getting results.
Gradually I developed my new trading strategies and added in those habits in the form of the “Master Currency Files.” This was where I developed the habit of recording the news and news impacts into the Master Currency Files.
Then eventually I revamped my strategy for finding the stops and barriers so that I wasn’t spending too much time trying to figure out every stop loss location. That got down the time I spent on the stops and barriers to well under twenty minutes per day.
Eventually I added in some more macro elements and scenarios to my Master Currency Files.
The Correlation/Sensitivity Sheet was added in during the process of creating the Mastery Course.
Continuing on the process of tweaking and revamping the daily habits, I am now presenting the updated version.
This version changes the order of the daily habits a bit, adds in 2-3 new habits, as well as presents a revised correlation/sensitivity sheet.
How I Do My Daily Habits (version 2.0)
The first important question you may ask is: What is the purpose of the daily habits? Why are they important? Can’t you just wing it?
No you don’t just wing it!
If you ever want to have a triple digit or quadruple digit return year, then you don’t wing it! You need to have a very strong strategies and a philosophy that you approach the markets with. If you ever want to take a 5 figure account into a 6 figure or 7 figure account, then you don’t wing it! You have a strong daily regimen that you implement.
Especially if you are still in the learning stage and still soaking up knowledge and trading wisdom and trying to apply it. You may consider winging it after you have “made it” and hit your mark with regards to how much money you want to make from trading. But even then, you still probably do not want to wing it.
Sports teams and professional athletes don’t just wing it. They don’t wake up one day and decide to get together and go play a game and wherever the wind blows them and takes them.
They do not do that.
They need to practice before the game. Practice before the season starts.
Hedge fund managers do not just wing it. They don’t just pop into the office one day and start placing hundreds of millions or billions of dollars of transactions without any research or analysis or work being done. They need to have done some research, analysis or work the day before or the week before, etc. They need to be plugged into the information flow and money flow of the world. Or else they cannot lay down a big trade.
In my opinion, one of the biggest reasons aspiring traders (and business people and people in general) fail is because they wake up every day and do not know what they need to do. They wake up every day and are confused about what they need to do to get results. They don’t have a list of things to do. Or if they do have a list, they don’t have much confidence in it, or do it in a poorly executed fashion. Most people fail because they wake up and start mucking around and go wherever the day happens to take them. Most people are wanderers. They are drifters. They lack discipline and focus.
It happened to me as well. I was waking up and unsure about how to analyze the market. I so desperately wanted a structured way to do my market analysis. So I can develop consistent, rational analysis, rooted in the market foundational principles. I didn’t want to just wake up and start browsing some trading forums trying out some hot new forex robot or technical indicator system.
I so much wanted to work! I just didn’t know what to do and did not know what I did not know. What I needed was a list of things to do that I knew I had the skill to do them, and that I could believe that the work would be getting me to the place I aspired to go.
Also, I did not start out with any mentors or teachers or parents or family members that could teach me how to trade. I had to develop skill starting from nothing. It was quite a daunting task. I was willing to work diligently for trading success, but in the beginning I did not have any confidence in my daily routine. I was scared to commit to daily habits because I had failed in trading for months prior and was scared of throwing more time away.
You start to remember what some of your friends and family may have told you about being crazy about trying to make money from the markets. Their comments about how the markets are just a big conspiracy and that you need to know friends in high places, etc. Or you start to remember some success quotes about how you need to “love what you do.” Well with the wrong habits, I certainly was not loving it! A lot of needless pain and suffering.
It was only with the right habits, right market principles was I able to start loving trading.
Eventually I settled upon having the proper daily habits. Habits that I could do every day and after a few weeks or months notice that I was making progress. Personally, I didn’t see results quickly when I did my daily habits. Years ago, my daily habits were not fully formed and were not the way they are now. And I was lacking critical concepts such as information flow, scenarios, volatility, expectations, macro, etc. I was trying to do order flow habits using only knowledge of stops and barriers. And that was not making the progress I was hoping for. So it did take me 6-12 months to finally see some results. But for you, since you have the order flow mastery course in your hands and have these trading principles and concepts that I have refined for you over the past few years, the progress should come within weeks. When I started, I had no order flow mastery course, so I struggled with all the things I did not know. You don’t know what you don’t know! And you struggle to find the information that is valuable when you don’t know what to look for!
I knew I could not systemize 100% of it, but I did want to break the market analysis down into a process. That way I could focus on the trading process and risk instead of focusing too much on the money.
I wanted to break down trading success into certain universal principles and habits. And I believe I was able to do that with the daily habits in this mastery course.
Knowing that you have the right daily habits, developing skill in performing them well, not only helps to increase your trading results, but it also starts a virtuous cycle. If you know what to do for 1-4 hours during the day, then the self discipline that you used, spills over to other parts of your trading and life. You start to have a better attitude about trading and life in general. You start to feel more and more like a success because you were at least able to do your daily habits, and do them well, knowing that you are going in the right direction by laying the strong foundations for the way all the markets move. You start to have purpose in your life. Your self confidence and self worth rise substantially.
The further purpose of the daily habits is to attain mastery of the most important and powerful market players: the news/sentiment/fundamental/macro players. This is what separates the true order flow trader from, say, a chart pattern or technical indicator trader. The order flow trader wants to do sufficient research to make sure they have the news/sentiment/fundamental/macro aggressive order flow and volatility in their favor. While the chart pattern or tech trader tries to hope that their tools will catch some of the market movements.
How Do I handle Sunday news/habits?
Easy. Any news released on Sunday I cover together with Monday’s habits, or I do them in a mini daily habits session on Sunday night. Many financial markets do open on Sunday past 5pm EST, so you can certainly interpret information flow during that time and add any small notes to your master files.
What time of day do I do the daily habits?
I keep this flexible. I am on the east coast, so I would consider beginning the daily habits any time after noon(12pm). If I start them at noon, then with watching the market and doing the habits, it could take me 3-4 hours to complete. So then I could be done by 3pm or 4pm. Other times, I may start the daily habits around 5pm or so. Other times, if there is an emergency during the day or other delays, then I may be forced to do the daily habits late at night between 8pm – 12am. On other rare occasions I may be unable to complete them and be forced to play catch up during the next trading way, which is not the best spot to be in.
Years ago, I only did the daily habits on an end of day basis. And I would initially recommend you do it on an end of day basis first. But once you get good, you can do it in real time during the trading day. Most traders are not glued every second to their 1 minute or tick charts, nor are they always busy 100% of the trading day. So during your idle moments you can be completing your daily habits, such as recording the news, collecting the snippets of sentiment and expectations from the articles and information flow, etc. So by the time the trading day is over, you can have completed most of your daily habits.
There are other things that you also have the ability to adjust on an intraday basis. For example, with labeling the stop loss levels. You can do that only on an end of day basis. Or you can also choose to tweak them on an intraday basis as the stop loss levels are triggered and new highs and lows are created.
You may wonder how long do the daily habits take to complete? It depends on:
1. How many habits you decide to do
For example, someone who only decides to label the stops and option barriers is going to complete the daily habits much faster than someone else who decides to analyze the news impacts and read the articles for the little snippets of expectations/sentiment/macro. Someone who only labels the stops and barriers may finish the habits in less than twenty minutes. While the other person who does the news impact releases and article reading may take 1-3 hours.
The advantage of only doing the stops/barriers is that you finish the task quickly. The disadvantage is that your maximum opportunity set is lower as you only know about stops and barrier trading tactics. Also, your trading potential is capped since you are not learning about the most powerful market participants: The news/sentiment/fundamental/macro players.
The advantage of doing the news and article research is that your maximum opportunity set is very high. Your trading potential is unlimited as you are understanding how to play the game at a higher level. You understand information flow, expectations and that the markets are a battle of different scenarios. The disadvantage is that it takes 1-3 hours or so to complete the daily habits.
2. How many news releases there are to record and analyze
If there are only four news releases for the day on the ForexFactory calendar, then the habits can go quickly as you don’t have to analyze 10 different currency pair reaction to so many pieces of news. If there are twenty pieces of news, and some of them are major reports or central bank meetings, then it takes longer because not only are you inputting the news impacts, you are also reading the central bank statement and trying to find the key words and phrases, etc.
3. How many currency pairs / financial products you are trying to follow
If someone is only trying to trade the JPY, then doing the daily habits can go very quickly as you can quickly analyze the news/sentiment/fundamental/macro situation very quickly. On the other hand, if you are analyzing the eight currency pairs such as – EUR, GBP, USD, CHF, JPY, AUD, NZD, CAD, as well as the S&P, Gold, Crude Oil Bonds, etc, and even adding some stocks in there as well, then it becomes much more work.
The advantage of trading just a single currency or just a few is that the habits go faster. However, your maximum opportunity set is lower. For example, if you only perform macro analysis on the AUD, but the macro environment is not conducive to big movements, then your trading potential is limited. You could be missing out on big trends in other currency pairs.
The advantage of trading many different currency pairs and financial instruments is that your maximum opportunity set is extremely high. The disadvantage is that the daily habits take more time.
If you want the highest possible chance to achieve trading success, reach your monetary goals, and do them as quickly as possible, you want your maximum opportunity set to be as high as possible. That way you can take advantage of the ODVE, MDMM, and GM moves across a wide swath of currency pairs and financial markets around the world.
4. If you are truly focused on completing the daily habits or are trying to multi task at the same time and trade or do other things, etc.
If you try to do the daily habits but get distracted by emails, Facebook, YouTube, kids, or staring at 1 min charts or currency pairs, or staring at a position every second as it ticks against you, or dealing with a life or family emergency, etc then the daily habits process can drag on for hours and hours.
If you don’t have those distractions, then you can focus like like a laser on the information flow that is important, properly interpret it, record it, and put it into action. You can focus all your energies on the task at hand.
As the book Acres of Diamonds writes about Abraham Lincoln:
Abraham Lincoln’s principle for greatness can be adopted by nearly all. This was his rule: Whatsoever he had to do at all, he put his whole mind into it and held it there until that was all done. That makes men great almost anywhere.
How much time do I spend to complete the daily habits?
Typically, I spend around 2-4 hours to complete my daily habits every day.
You may think that is a lot of time, but in the grand scheme of things I do not consider it to be so. Always remember that you are developing an interpretation advantage that will remain with you for your whole life. You are spending time gaining much skill on the foundational and key principles of the markets. That is a phenomenal investment to make in yourself.
Also, you don’t need any “insider knowledge.”
Warren Buffet once said:
With enough insider information and a million dollars, you can go broke in a year.
And from the book The Alpha Masters:
One thing that mystified me was how, through various applied strategies, managers were able to profit by using publicly available information, and by seeing things in that data that the majority of investors could not see.
Always remember that you want to develop an interpretation advantage and edge that can last your entire life. The daily habits do that for you.
If you spend 1 hour per day doing the daily habits, that is 5 hours a week. Just 5 hours a week, and you can take weekends off if you want. If you spend 2 hours a day, that is 10 hours a week. If you spend 4 hours a day, that is 20 hours a week. But if you complete Friday’s habits on Friday, then you can take the weekend off.
Statistics show that the average American watches anywhere from 25-35 hours per week of television. If you spend 20 hours a week on the daily habits, then you still have time left over for television if you want to do that.
Or you can do further work and research on the weekend if you want to and are really committed to making fast trading progress.
Typically, if you want to make faster trading progress and make more money, and do it faster, then you should put in some time on the weekends. If you want to make a bit less money and make it slower, then you don’t have to work on weekends.
Of course when doing work, I am assuming you are doing smart work related to the core principles of speculation taught in this mastery course. The concepts and principles such as: information flow, volatility, all trades are not created equal, trade win rate does not stay the same, ODVE, MDMM, GM, liquidity, expectations, scenarios, sentiment, global macro, sensitivity, positioning, etc.
If you are spending loads of time trying out new technical indicators or forex robots without a clear market philosophy, then you may not get the results you seek.
You have to firmly understand that the game of trading the financial markets is the biggest game in the world. It’s bigger than poker and casinos, bigger than the oil and gas business, etc. Every day there is so much money flowing around and opportunity. Large hedge funds, pension funds and financial institutions are completing transactions for millions and billions of dollars every day. Profit and loss swings are tens and hundreds of millions and billions of dollars… every day depending on the volatility. The bigger the volatility the bigger the swings.
You just have to have the proper mindset, beliefs, and strategies for you to dip into that stream of opportunity. You can’t capture every single movement out there. No one can do that. You just have to capture some of the moves. And with the trading principles such as liquidity, volatility, ODVE and MDMM and GM movements, information flow, news, sentiment, expectations, scenarios, sensitivity, positioning, global macro, all trades are not created equal, trade win rate does not stay the same, etc. These principles last a lifetime and allow you to dip into the unlimited steam of opportunity.
As Jesse Livermore said:
I fully understood that I was not the only one who knew that the stock market is the world’s biggest gold mine, sitting at the foot of the island of Manhattan. A gold mine that opens its doors everyday and invites any and all people in to plumb its depths and leave with wheelbarrows full of gold bars, if they can, and I have done it. The gold mine is there all right, and I believe everyday someone plumbs its depths, and when the bell rings at the end of thee day they have gone from pauper to prince, or from prince to supreme potentate… or stony broke. And it’s always there, waiting.
It is literally true that millions come easier to a trader after he knows how to trade that hundreds did in the days of his ignorance.
That is why in my opinion, having the proper daily habits and spending anywhere from 1-4 hours a day on them is a very, very small price to pay for developing discipline and plugging yourself into the unlimited stream of opportunity of the financial markets.
Habit #1 – Label the stops, option barriers and set price alerts (5-15 minutes)
I have made this the first habit since you can get this done quickly and you set up your price alerts, so that if a stop level or barrier gets triggered while you are doing your other daily habits, you can at least hear the price alert and decide if you want to go with the move, fade the move or do nothing.
This habit takes me around 5-15 minutes or so.
I don’t want to spend half an hour or one hour or two hours trying to find every single possible stop loss location. I did that in my early days and it was hurting my trading since it made me focus on the tiny 20 pip, 30 pip moves, when in reality I should of been focusing on the news, sentiment, scenarios, macro, etc so I could capture the bigger moves.
Therefore, what I do for the stop losses is simply go through my currency pair charts and find out the nearest topside stop level and nearest bottomside stop level. I draw horizontal lines across them. Then I set price alerts for them.
In every currency pair, I have two price alerts. One for if the topside stops get triggered, and another for if the bottom side stops get triggered. Sometimes the stop loss level is also the barrier level.
Here is an example of a chart where the topside stop loss area is also an option barrier:
This way I don’t have 10 different price alerts for a single currency pair. I don’t want to have 10 different topside price alerts for 10 different topside stop levels, and the same thing for the downside stops. I just choose the one closest topside stop level and the one closest bottom side stop level, and mark it on my chart with a horizontal line, and set price alerts for them. That way I have two price alerts always active for each currency pair / financial instrument that I trade – one for the topside stops, and one for the bottom side stops.
When a price alert gets triggered, then I find the next nearest stop loss level by using the chart method or option barrier method and marking that off with another horizontal line, and setting another price alert.
Here are some more examples of how I mark off my stop loss levels:
What time frame do I use? I am flexible with this. Usually I do not got lower than 15 min time frame to find the charts. Sometimes, I use 15 min, or 30 min, or 1 hour, or sometimes even 4 hour charts.
Also, if you don’t want to label the key stops on the intraday time frames of 15 min – 4 hours, you can choose to just use them purely on the daily charts and weekly charts for the major swings.
For example, on a daily chart you could do this:
Or on a stock chart you could do this:
The advantage with using a daily chart or weekly chart is that you can take a more laid back approach as there are not 30 different price alerts firing off every single day. You can go days or weeks without a price alert being triggered if you are using the daily or weekly charts. But when one does get triggered, it can be more meaningful. The disadvantage is that sometimes by the time the price alert gets triggered on the daily or weekly charts, the move can already be over. So your maximum opportunity set with using daily or weekly charts for making stop losses gets diminished. Therefore, if you want to do intraday trading, you would use an intraday chart of 15 min up to 1hr / 4hr charts to find the stop losses closest to the current market moment.
Labeling the stops is important, because I do not want to always be staring at my screen. Sometimes I am away from the computer, but I hear the price alert going off and I know something is triggering stops or breaking out. So then I can go back to the computer and see if I want to “go with the move”, “fade the move”, or do nothing. Sometimes I already have a limit order set to fade the stops. Other times I may want to go with the move, but wait for a retracement because usually I do not like to enter the market using buy or sell stops. Other times I do nothing because I am uncertain as to the macro order flow. There may be all sorts of price alerts that get triggered during the day but I may do nothing because I am uncertain as to what is going on. There may be 10 or 20 price alerts during the day, but I may only place 1 or 2 trades. You definitely do not trade every price alert that gets triggered because it will drive you insane.
Doing this is important because it helps lay the foundations for developing the right “macro model” to use for a particular financial instrument at any given point in time. For example, lets say the market is in a downtrend, and I believe the macro is to the bearish side and I want to go short. Well, now I would have to decide when and where to I short it?
Do I short it after it trips downside stops and makes a fresh low?
Do I wait for it to retrace 30 pips from the lows then short it?
Do I wait for the market to retrace 100 pips off the lows and short it?
Do I wait for the market to trip light topside stops first, then short it?
Do I wait for the market to retrace, trip major topside stops first, then short it?
Labeling the stops and barriers helps to lay the foundation for getting the right “macro model.” Why is this important? Because lets say the market is in a downtrend, and you decide to short it after it trips downside stops and makes a fresh low, but there is no further immediate macro order flow to drive the market lower, so short covering occurs and the market snaps higher 100 pips and you are in a draw down. In this case, the reward risk ratio was horrible, because you tried to short it at a fresh low, where you were taking on the risk of a short covering rally as the bearish macro order flow was exhausted. If you waited for some topside stops to get tripped, then shorted it, the reward risk ratio could of been far better.
There are some trades that I will only place, if stops are triggered causing the market to overextend, resulting in myself getting in at a better price, or else I deem the reward to risk ratio unattractive.
Similarly, there are some uptrends that you want to go long, but you have to time it right. Some uptrends can be a bit overextended, and if you try to buy a fresh high, the macro may not be strong enough to cause more upside volatility. So in that case, it would be better to wait for an intraday dip, or tripping of downside stops first before going long, which would result in a much more attractive reward to risk ratio.
Thus, a large part of the trading game is to determine the proper way to play a specific financial instrument at that specific moment in time. How to play it on that specific trading day. The right “macro model” does not stay constant. It can shift at a moments notice. With the right new scenario or news release, the macro model can shift.
Now, I can’t possibly predict what will be the proper macro model every day into the future. That is impossible. I just like to take it one day at a time, interpreting the situation and information flow on that specific day. I just perform my daily habits to stay abreast of the situation on that specific moment in time.
As Paul Tudor Jones said in Market Wizards:
The only relevant question is whether you are bullish or bearish on the position that day… relevant to whether the market environment is bullish or bearish right now, or to the risk/reward balance… of a position at that moment.
Then I go through IFR news to see if they reported any option barrier activity. Usually what I do is to go into the search field and search for “barrier”, then “exotic”, then “binary.” I put them in one at a time and see if it shows any option activity in the search results. If there isn’t, then I move on to using my chart based method for locating potential barrier levels and marking them off
For example, if a currency pair is in a strong downtrend, then I can probably assume there are barriers below the most recent lows at key levels such as the 100 pip levels or 50 pip levels, etc. Or if the currency pair is in a tight range for a long time, then I can assume that people bought some DNT options, with barrier levels both above and below the market.
See the lesson: Finding the Barriers on the Chart:
Habit #2 – Record Whole News Articles (15 – 40 minutes)
This is a habit that I stopped doing. I still read the articles, but I do not record them anymore.
Previously, I recorded the relevant news articles in their own Microsoft Word file. So for example, all the news articles from the Bloomberg, Reuters, Financial Times, and sometimes WSJ or Marketwatch, I could record them.
I would start off on Bloomberg, save one article about the equity markets, a few articles on currencies, one article about crude oil, one article about gold, one article about bonds. Then I would move on to Reuters, where I would save one article on the equity markets and a few articles on currencies. Then sometimes I would move over to Financial Times, WSJ, or Marketwatch. Then by the end of that process, I would have say 15-30 articles saved in their own separate word file that I would label with the day.
Note that in this process, I only recorded them in a Word file. I did not read them while I was saving them into the file. I was just making sure that I generally agreed with the article title or part of its contents and saved it in my Word file.
After this process, which took anywhere from 15-40 minutes, then I would read the articles from the Word file and copy and past the key phrases, paragraphs, quotes, snippets, etc into my currency master files. By the time you start reaching the end of the series of article, a lot of it is just regurgitation. By the time you get to the end of the article list, the articles probably start to say similar things, which is fine since you can go faster.
I did that for years. I feel that it helped to embed the market sentiment, expectations and global macro information into my subconscious. There were some days, weeks or months that I missed out on, but by and large, I kept up this habit fairly consistently for years.
You can see that I recorded the news for you between August 2011 – 2012.
However, I stopped that habit around December of 2012. I am constantly trying to tweak my daily habits to either introduce new ones, tweak existing ones, or find ways to do them faster. I am constantly trying to figure out which ones are necessary and which ones I can get rid of. I am always trying to figure out how to shorten them or combine some of them if I can.
So what do I do now?
Now I just read the article or skim it from the internet browser and input the key information and snippets directly into my currency master files. I stopped saving all the articles into their own files in Microsoft Word. That saves me 15-40 minutes per day, so I can spend on other more important things – like scenarios and macro and sensitivity research.
Now I have two monitors open. The left one has the internet browser open with the article I am reading, and the right monitor has all my currency/financial instrument Microsoft Word files open and I just copy and past the little snippets into their proper files.
I keep separate Microsoft Word Files for the following currencies / financial instruments:
So these are 12 files that I keep. I create these files for every year. So for example, I have a separate EUR 2012 file, and a separate EUR 2013 file. Then when 2014 comes along, I will start another EUR 2014 file.
That way I keep things organized by year, so that I am not trying to scroll through information that is years old to get to the current things.
I keep these files in a folder I sync with Google Drive / Cloud at https://drive.google.com/.
That way the files are always saved in the cloud and I can access them from my laptop or any other computer. There are many other cloud storage / syncing services, so it can be worth exploring that possibility further, so you are not trying to carry around USB flash drives, external hard drives, etc trying to sync all your trading files between multiple computers.
In many cases, I don’t even read the whole article anymore. Sometimes I just skim the article if I know where the proper information should be. After reading the daily articles for several months or years, you tend to know how the authors of the various websites write. They have their standard structure for how they write and you kind of know where the little snippets of news, sentiment, expectations, etc will be. So I generally know where to look for the relevant information.
Habit #3 – Record news impact releases into Master files (10 – 70 minutes)
This is where I begin the process of recording the forex news from the calendar into my Master Currency Files. I open up a ForexFactory calendar for the day on one monitor. Then I open up my Master Currency files in Microsoft Word in my other monitor. Then I type in the name of the news release and the actual/forecast/previous numbers into the relevant Master File. Then I go onto the 1 minute charts to complete the news impact releases and record them into my Mastery Currency Files.
Some days the news is light where there are very few news releases, say only 5. Other times it is jam packed with news releases and could number 20 or 30.
Most of the news reports will be No Market Impact (NMI), but I still input them into the currency master files anyways.
There can also be some Federal Reserve or other central bank speakers that many times they give a speech, but that they make sure they don’t drop any clues about monetary policy. The like to do academic speeches that do not move the market, so I just avoid recording those if they did not move the market.
This process can take some time if there are major news reports being released, such as NFP or other ones and I am attempting to record 10-20 different currency pair reactions for them. It can be a time consuming process going through the 1 min charts and recorded the proper news impact.
I admit, that sometimes I try to speed up the process by only doing one currency pair of the bunch rather than all of them. For example if the NZD/USD moved +20 pips FM, + 40 pips over next two hours, then sometimes I try to speed up the process by avoiding recording the NZD/JPY or EUR/NZD, etc and just assuming that they made a similar impact. So sometimes I do try to speed up the process by assuming things, if I believe my time is spent better on doing more scenario analysis or on other things.
Let me give you some examples of how I recorded some news for the week of May 27 – May 31st, 2013:
May 30: US Prelim GDP q/q at 2.4% / 2.5% / 2.5%
Unemployment Claims at 354k / 342k / 344k
Prelim GDP Price Index q/q at 1.1% / 1.2% / 1.2%
EUR/USD: +28 pips FM, ret full, then +78 pips next few hours
GBP/USD: +27 pips FM, ret half, then +85 pips rest of day
USD/CHF: -30 pips FM, ret half, then -78 pips rest of day
USD/JPY: -25 pips FM, ret full, then -85 pips rest of day
AUD/USD: +26 pips FM, ret full, then +70 pips rest of day
NZD/USD: +13 pips FM, ret full, then +76 pips rest of day
USD/CAD: -14 pips FM, ret full, then -69 pips rest of day
EUR/CHF: -17 pips FM, then NS
Gold: +$6 FM, ret half, then +$10 over rest of day
S&P: whipsaw, NMI
Bonds: +13 tics FM, ret half, then +10 tics next hour
Crude: -$0.20 cents FM, then choppy, then dropped 80 cents took out downside stops below $92.00
May 28: CAD Corporate Profits q/q at -1.2% / 1.4%
Habit #4 – Analyze end of day news and input important information into the Master files (15-40 minutes)
I talked above about how I stopped saving the whole articles into their own Microsoft Word document.
Now I just read the article directly from the browser, and then input the key words, phrases, sentences, snippets, etc into the relevant Master File. For example, if it is information relevant to the S&P, then I will save those snippets in the S&P Master File. If it is information about the JPY, then I will save it to the JPY Master File, etc.
Currently, I am just using the Bloomberg website and Reuters website. That is my current setup. Those news articles, combine with my own scenario sheets, etc should give me the information I need to work with.
Here are some examples of what information and snippets I saved from articles:
The dollar dropped to a three-week low versus the euro as the U.S. economy expanded less than previously estimated and jobless-benefit claims rose, reducing speculation the Federal Reserve will cut back on stimulus.
The U.S. economy expanded less than previously estimated in the first quarter as slower inventory building and cutbacks in government spending overshadowed the biggest gain in consumer purchases since the end of 2010.
"The weaker data in the United States takes the pressure off
the Fed to taper and it also erodes one of the foundations of
the U.S. dollar bull market," said Adam Button, a currency
analyst at ForexLive in Montreal.
“We need two things, according to Bernanke, to consider tapering. That is, we need stronger data, and we need more confidence of sustained improvement. And today’s data simply does not support that conclusion,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
The U.S. dollar fell to a three-week low against the euro on Thursday after unexpectedly weak U.S. economic data dampened expectations the Federal Reserve will reduce its monetary stimulus soon.
“The U.S. dollar fell to a three-week low against the euro on Thursday after unexpectedly weak U.S. economic data cooled expectations that the Federal Reserve will reduce its monetary stimulus soon.”
“Gold climbed to a two-week high on speculation that the Federal Reserve will maintain bond purchases to bolster the U.S. economy, boosting demand for the precious metal as a store of value. Silver also rose.”
“U.S. stocks rose, following the Dow Jones Industrial Average’s biggest drop in four weeks, as weaker-than-expected data on economic growth and jobless claims boosted speculation the Federal Reserve will maintain stimulus.”
That is all I do! I collect the little snippets, sentences, phrases and paragraphs from the various news articles and the ones that I deem important, I save that information into my master files. Which information do I deem important? The information that revolves around news, news impacts, information flow, global macro scenarios, sensitivity, sentiment, etc. If someone is talking about a moving average or ichimoku kinko hyo, or a fibonacci, etc, then I want to stay away from those things. Turn your eyes away from every trading principle and belief that you don’t believe in.
Habit #5 – Recording other intraday events and IFR (5 – 20 minutes)
After I finish analyzing and saving the snippets from the end of day news, then I turn my attention to IFR and the other intraday events that were not on the forex calendar that could of moved the market.
There are times when I feel there was a movement in the currency pair / financial instrument that I was not able to understand why, then the reason can be found in that there was some news that was released that was unscheduled. So this is where I go through IFR news on Oanda to find out what happened. Sometimes I look through the “currency briefings” pieces of news. Other times I type in the currency that I am looking for. If there was a strange move in the EUR that I was unsure of, then I would type in “EUR” in the search field to focus on only the EUR specific pieces of news so I can see what happened. For example, if the move occurred because some central banker in Europe said something, then I would record that in my EUR currency file. I would write out what he said that caused the movement, then apply the news impact recording method to that as best as I could.
Throughout this process I am also scanning IFR for any important information said by various central bank officials, etc. If some Federal Reserve members said something that I believe is important for helping me anticipate future monetary policy decisions, then I will record this into my currency files. Even if what they said did not cause movement, if I deem it important information, then I still record it.
Important information is not always immediate market moving information. Even if the information is not immediate market moving, it can be good to know and record in your currency files so they give you insight into the mind of the central bankers and how they can vote and formulate monetary policy going forward.
For example, if a Fed official talks about some Dodd-frank regulation, etc, then I am probably going to ignore it. If however, another Fed official talks about how he believes that bond buying is great for the economy and outweighs the risks, then I will record that information into my USD currency files. That is an important tidbit of information even if it didn’t cause any massive immediate movements. Why? Because I can therefore assume that as long as the economic data doesn’t surprise to the upside by a very big amount, that this Fed official is going to continue to support more Fed QE, since he believes that the benefits outweigh the risks, etc.
May 29, 2013: USD, FED Rosengren:
– Open to modest cut in bond buys in a few months
– Can taper bond buys if there’s more progress in recovery
– expects pace of recovery will continue
– best to taper, not halt, bond buying when time comes
– Fed must be willing to adjust bond buying up or down
– Premature to change bond-buying pace right now
– Unemployment still too high, inflation too weak
– economy still needs significant accommodation
– Fed can dial monetary policy up or down
– Like to see consistent job growth of 200,000 a month
May 29, 2013: EUR, ECB Constancio:
– April 1.2% inflation rate came as surprise
– Fall in inflation rate much quicker than anticipated
– Low inflation poses risk to growth, bank profitability
May 24, 2013: USD, Fed Bullard:
– shouldn’t taper Fed stimulus until inflation picks up
– ECB OMT no substitute for stimulus
– ECB may have to consider new stimulus measures
I feel some of the above information and comments by the central bank officials give you a much stronger grasp of the current macro environment, what the near future bullish and bearish scenarios can be, and help you to anticipate some of their policy actions.
An example of a piece of news that moved the market that was not on the Forex Calendar, occurred on Friday, May 31, 2013.
The EUR moved lower starting around 4:30 AM EST. So I checked my IFR News and it showed these comments from the the Governor of the Banca D’Italia (Bank of Italy), Ignazio Visco:
The most important comment that he made, was that the ECB stands ready to intervene again. What this means is that the ECB is standing ready to do more in the case that weaker economic data / lower inflation come out. Doing more in this case means that the ECB could cut the deposit rate to negative that they have hinted at slightly over the past few weeks. The rest of his comments were not important in my opinion. That wast the only comment that was market moving in my view.
Why? Because there are currencies out there that are depreciating, such as the AUD and NZD since their central banks have cut rates and/or threatening to cut rates in the future. So the market is trying to figure out if the other currencies such as the EUR, GBP and CAD will also implement some form of monetary easing or accommodation.
What does monetary easing and monetary accommodation mean? Simply, it means cutting interest rates, or engaging in some form of quantitative easing. It is called “monetary easing” since lower interest rates should make it easier for the economy to recover, expand, etc. It is also called “monetary accommodation” because they are making the adjustments and fine tuning, and providing support to the economy through lower interest rates.
So that comment by ECB Visco, caused the EUR to sell off. I have marked down the news impact in the chart below:
Habit #6 – Labeling the story, news, key words, key themes, explanations on your chart (10-20 minutes)
This is a habit I have very recently added.
Many of the previous habits involved recording the information in digital files or handwriting it on paper. And if you wanted to find the relationship between the volatility and explanation for the reason the market moved, you would either have to remember it from your head, or have to dig up the explanation from your digital files or stacks of papers that you have. You would have to scroll to the day in your digital files or search for what happened on a previous day if you did not remember it.
I have come to the conclusion that having the information in the master files is not enough. For better trading performance, you want the right information to be sorted and displayed and be exposed to it properly and efficiently on your charts and in front of you. Not buried in digital files or stacks of paper.
That is why I have now decided to write in the story as text on a chart. To write in the key information for why the market moved in the past and shifting sensitivity, and to paste it on the chart.
Previously, I was reluctant to do this and just kept some of the stop loss and barrier levels on my plain price chart. I was reluctant to add anything else because I didn’t want to go back to cluttering up my chart too much with unnecessary things.
But I figured I would make an exception this time, so that it would make my life and trading easier. If the information can be directly pasted on a chart, then I can quickly see the reason or explanation or shifting sensitivity right on the chart on the particular currency pair or financial instrument.
So what I do with this habit, is every day I copy over part of what I have written down in my Master Currency Files and/or correlation sensitivity sheet into the chart of the relevant currency pair or financial instrument.
I particularly want to focus putting on the chart:
1. Which news/scenario and shifting expectations moved the market
2. How the market is responding to news (potential sensitivity shift)
3. What the potential macro model given the information on that specific day. Like should you avoid buying fresh highs, or avoid shorting fresh lows, or only look to buy after downside stops are tripped, or only look to sell after topside stops are tripped, etc.
4. If you had any winning or losing trades, you can place arrows on your charts if there are not there already and write in your explanations for why the trade won or lost on your chart.
The bullish information, I write it in underneath the price on that day. The bearish information I write it in above the price.
Now if you try to fill in the information for 25 or 30 different currency pairs, it can be a bit overwhelming. So I just focus on labeling the EUR/USD, GBP/USD, USD/CHF, USD/JPY, AUD/USD, NZD/USD, and USD/CAD for the most part.
What this habit does is help you display the most important information on your charts. Trading is about a search for what truly moved the market and what truly move it in the future. Once you gather the proper information, you want to display it in the proper way. So you have your Master Currency Files. You have your Scenario Sheets. You have your Correlation/Sensitivity sheet. Now you have the proper information displayed on your charts.
In some ways I think I should of developed this habit earlier, but this simple technique eluded me, even though I did a very similar thing in developing the Mastery Course and marking up the charts to show the various scenarios that moved the market.
Here are some examples:
As you can see in the above USD/JPY chart, I have also adding in some comments about the macro model that I see on that given moment in time. I wrote in: “Do not short the lows.” That gives me clues during the trading day, if I see a downside tripping of stops, I will refrain from shorting the break out to the downside, because there is the strong possibility that there will be macro exhaustion and the price can snap higher. That also means, I can consider going long from the lows or go long after the downside stops are tripped.
Of course, the market does not remain static, it is dynamic. It is constantly taking in new information, and with the proper fresh catalyst or change in the situation, the market could easily break out the downside for a big collapse. I cannot be perfect, but I just try my best to analyze the situation at the end of the day and try to figure out the proper macro and timing model to apply at any given moment in time.
That is what trading is about. You interpret information to determine whether you should go long, short, or do nothing. You analyze a recent market movements to determine whether you should go with the move, fade the mode or do nothing. At a very basic level, that is what trading is. Interpreting information to determine what you should do. Now some people in the technical indicator mindset interpret technical indicators to help tell them what to do. People with a chart or price pattern mindset, interpret chart and price patterns to help tell them what to do.
So if trading is about interpreting information to figure out what to do, then it stands to reason that you want to be analyzing the best possible information, most relevant information, in a properly structured and displayed to help tell you what to do. For the trader who analyzes the truth of the market movements stands a much higher chance of long term success than someone else who is basing their trading decisions on false information or delusional thinking.
Habit #7 – Update Trade Journal (5 – 10 minutes)
At the end of the day, if you want, you can input all your trades into your trading journal.
I talk about all the different columns you can have in your trading journal in this lesson: http://orderflowforex.com/they-do-not-keep-a-trading-journal/
However, that is the long version of it.
I have since made a shortened version of the trading journal, trying to only include the really important columns.
The shortened version includes just these columns:
Day of the Week
Long or Short
Type of Inefficiency
Profit or loss in dollars(or your base currency, or currency of your account)
Commission Cost (total for the opening and closing of the position)
Total Gain / Loss in dollars after deducting commission cost
Profit or loss %
What type of trading loss if the trade lost money?
How many open positions total? (including the one you just placed)
Reasons for taking the trade
What I Learned – Trade Management wise
What I Learned – Exit strategy and liquidating the trade
What I Learned after long term reflection of several days, weeks, or months later
That is the shortened version of the trading journal that only has 19 columns, while the other trading journal in this lesson, had a whopping 44 columns. You can pick and choose what columns you want to add, or add your own!
As Bruce Lee once said:
Absorb what is useful, discard what is useless, and add what is uniquely your own.
Habit # 8- Prepare for next days news releases (5 – 30 minutes)
This is where I go through the next days calendar seeing the news releases. Sometimes I automatically know which ones can cause volatility. Other times, I need to search for the news release in my master files to get a reminder of how much the market moved in the past due to a certain deviation change. I want to see which news releases are potential candidates for going with the move or for fading the spike. I want to know in a broad sense what the deviation from forecast needs to be to cause the market to spike FM and go with the move, and what deviation will only cause a FM spike, then reversal.
This is where doing the daily habits is very nice because you can go back into your currency files and see that a certain deviation caused “x” amount of movement, etc. Then going forward you can sometimes assume a similar thing can happen in the future. Although it is certainly not perfect because market sensitivity can change and market environments can change. Also market positioning plays a role as well. For example, if a previous news release showed a 150 pip move, but then a similar deviation happens, but when it happens the currency pair has already moved 150 pips for the day, then the market may already be extended and you may not get a clean move as the expectation repricing macro order flow is fighting with intraday profit taking interest and it can be a choppy move.
If you want you can choose to prepare for the next days news the day before, which is what I usually do. Or you can prepare for all of next week during the weekend or week before.
I will cover this more in detail in future lessons/videos.
Habit #9 – Create Scenario Sheets and perform scenario analysis
Everyone has a different philosophy about the markets. As Van Tharp once said, you don’t trade the market, you trade your beliefs about the market. Warren Buffett has a certain investing philosophy. George Soros has his own investing and trading philosophy.
This market philosophy explains how you believe markets work, how and why prices move, your theory as to what makes a good trading or investing opportunity, what causes profits and losses on your trades. Overall, it guides you in spotting trading opportunities, in taking action, etc.
My philosophy is one of thinking of the market in terms of news, expectations, and scenarios. I happen to think it is a very powerful and flexible philosophy, that can benefit any trader or investor.
If you are trading a financial instrument and starting from scratch, then you should create bullish and bearish scenarios. It is one of the most effective ways to get a handle on what can cause the market move up and down.
One of the amazing and fabulous things about the scenario sheets you create is that they will help you for life. It can take time to do the research and create them, etc. But if you do them properly and discover the true scenarios and news/sentiment/fundamental/macro reasons for the market to move, then that will stay with you for life! You can refer to them today, in one week, in one month, next year, etc. They may require slight modifications as the years go by if you discover new scenarios that can move the market. But by and large, they stay mostly the same.
You have bullish news/sentiment/fundamental/macro scenarios, and bearish news/sentiment/fundamental/macro scenarios. Markets a battle of scenarios so get used to them! Having a scenario sheet with these two columns is one of the most powerful and simple things you can do to learn how to trade properly.
I have given you my scenario sheets that I have created. I have tried to list as many scenarios, big or small as possible. You may develop your own scenarios or revise them.
Occasionally, I do discover a new scenario as I go through the year and then I may want to add it to the scenario sheet.
While you have your “master scenario sheet” that can list 10-50 different scenarios for a particular financial instrument, remember that the market cannot be focusing on all those scenarios at the same time. The market can only be focusing on 1-5 key elements or scenarios at any given time. Therefore, you want to focus on what is moving the market over the past day or few days/weeks. You want to focus on what the current market moment is, then play out the nearest bullish and bearish scenarios from that market moment. So while on the master scenario sheets, there are dozens of potential scenarios, when you drill down to the current moment, there are only 1-5 key elements and scenarios that are important, so it becomes a much more easier and manageable number.
So while I am doing the daily habits, I am thinking about the current market moment, thinking about the economic data and market environment and realizing what are the most important scenarios so I can prepare to place those in my correlation/sensitivity sheet. If you want, you can place those scenarios in your currency master files if you want. Wherever you want to put them. Modify the habits to your hearts content to whatever works for you.
I have my scenario sheets printed out and I look over them from time to time for refreshers. If you want you can also keep them as digital files “in the cloud.”
So what I have done is created two forms of scenario sheets:
1. The first one is the master scenario sheet where I list every possible bullish and bearish scenario within reason, without taking into account what the current market environment is. I list every type of order flow generator to take into account different market environments, whether it is one of economic growth, inflation, etc. I just list as many as I can here. These scenario sheets are the ones I have already given to you in the mastery course.
2. The second one is the slightly newer scenario sheet that I have created. This is the one where I take all the scenarios from the mastery scenario list, and break them down into 3 categories:
A: Most Important / Relevant / Closest to Current Moment
B: Medium Probability Scenarios
C: Extreme Scenarios
So I take a look at the current market moment and what the market is pricing in, and then I organize the scenarios into the 3 categories shown above.
I will explain this in more detail below.
Habit #10 – Daily risk appetite vs risk aversion list (5 minutes)
This is another new habit I am sharing with you.
If you haven’t noticed, I am a big fan of having the most important information and principles to you available on a single sheet.
For example in the lesson: http://orderflowforex.com/order-flow-success-secrets/ I had the principles that the greatest traders focus on, vs what the beginner traders focus on.
I have the scenario sheets where you can see both the bullish and bearish scenarios.
I have the correlation/sensitivity sheet where I have the three columns there.
Now I am adding what I call the daily risk appetite vs risk aversion sheet/list.
What I do is take a piece of paper and create two columns. On the left is Risk appetite. On the right is Risk Aversion. I have one sheet of paper for every week.
Then every day during the week I list the day and the Risk Appetite reasons for that day and any Risk Aversion reasons for that day. By risk appetite and risk aversion, I am attempting to find the reasons that influence the equity market (primarily the S&P 500), global growth, etc. So any Fed QE, or economic data out of US, or any important data out of Europe, or any other country, as long as the market believed it influenced the equity market and global growth and caused a volatility move in the broad equity indices, then I want to write it down on my Risk Appetite vs Risk Aversion sheet.
If there was some data out of New Zealand or Australia that may have influenced and caused volatility in the NZD or AUD currencies, but did not influence primarily the US market, then I will NOT write it in.
I am looking for both reasons that are causing market orders to have been executed to move the price, but also for reasons that may have already been priced in, but still influencing market behavior by either propping up the price if it falls too much or capping any price gains if it rises too much.
For example, the market already knows that the FED has QE’d a lot and that is already priced into the S&P 500 rally. So while it may not be causing aggressive market order to move the price higher, the mere fact that the FED is still QE’ing, is propping up the prices on any major dips. What I am saying is that there are people long the market, solely for the reason that the FED is still engaging in QE, even though they are not planning to do any more. So if the FED were to suddenly cancel all their QE, then that would cause the S&P500 to drop precipitously, because all the people long the market expecting the FED to continue QE would aggressively dump their positions.
Here is an example of my daily risk appetite vs risk aversion list:
Friday, May 31, 2013:
– Fed QE until substantial labor market improvement
– Rotation out of bonds and other asset classes into equities
– Higher U.S. Chicago PMI
– profit taking
– Fed may taper QE fears
The reason I want to create this risk appetite, vs risk aversion list, is because a significant portion of the money made or lost in the financial markets is a function of it. If the stock market is up 30% for the year, chances are, there are a lot of hedge funds and pension funds, and 401k’s, etc that made a lot of money, whether actualized profits or paper profits. And if the stock market is down 30% for the year, chances are, there will be a lot of hedge funds, pension funds, 401k’s, etc that lost a lot of money, whether actualized losses or paper losses. That is just the way it works. Now just because most people are like that doesn’t mean you have to be like that.
You can structure your trades and investments and choose your volatility level anyway you want to. There are some hedge funds that prefer a more low volatility approach. They may only try to make around 8 – 15% per year, while only limiting drawdowns to less than 10% or less than 5%, regardless of what the S&P does.
Other hedge funds and individual traders can choose a more volatile approach. They can try to use more leverage to try to make 50% or 100% or 1,000% in a year, regardless of what the S&P does.
There were some years that the S&P was up 20% or 30%, but Soros was up 50% or 100%+. Obviously, he caught some very nice MDMM and GM movements, not just in the stock market, but in other markets as well. There were also some years when the S&P was up 20% or 30%, and Soros was only up 15%, or he was flat for the year. Obviously, in such a year he was not good at catching the MDMM and GM volatility movements. You can’t catch all the ODVE, MDMM and GM moves. The great thing is that you don’t have to in order to make whatever you want from the market.
I am going to talk about in a future premium lesson about the “alpha vs beta” in the market and many different ways to generate trading returns in the market during a given year.
I write this risk appetite vs risk aversion sheet out by hand, but if you want you can keep them as digital files and have them “in the cloud.” Or you can do both. You can create the handwritten version, then scan it and put it in digital form and in the cloud.
Habit #11 – Country Specific Bullish Growth vs Bearish Growth
This is another new habit I am adding.
Continuing on the theme that you want the best possible information displayed in a more easy way, I am adding what I call the Country Specific Bullish Growth vs Bearish Growth sheet.
Ray Dalio was described in Hedge Fund Market Wizards:
Dalio’s view that changes in expected growth and expected inflation are the dominant reasons that some asset classes do well when others do poorly.
Now, I don’t have 1,000 employees working for me like Ray Dalio has scouring the globe for all sorts of different trading opportunities. But that doesn’t mean I can’t form my own version of analysis of the shifting expectations for growth and inflation.
Now you should already have a lot of the macro information saved in your Master Currency Files. All the GDP, unemployment, retail sales, manufacturing data, etc should already be in your Master Currency Files.
However, you want to be on lookout for a sequence of good or bad data. A string of good or bad data. And you want to display this information in an easier way so you don’t have to dig it up from digital files, etc.
So what I did was create the Country Specific Bullish Growth vs Bearish Growth list.
I take a sheet of paper for each country. Currently I have the following sheets – Spain, France, Germany, Italy, Canada, China, Australia, United States, Japan, and Great Britain. The reason I picked Spain, France, Germany and Italy is because they are the largest members of the Eurozone. If you want you can keep separate lists for Greece or Portugal, etc, but I am avoiding those smaller economies.
On each sheet of paper, I create two columns. The left column is called Bullish Growth. The right column is called Bearish Growth.
If the economic data comes out better than expected I write that in the Bullish column along with the date of the news. If the economic data comes in worse than expected and indicates potential slowdown or contraction, then I write it in the Bearish column along with the date of the news.
I only write in whether it was higher or lower. I don’t write in the statistic or by how much it deviated from forecast. I just want to see if data is coming out better than expected indicating economic expansion, or worse than expected indicating slowdown or contraction.
I want to focus on the news that can actually have a bearing on growth. I focus on GDP, Jobs created or lost (NFP, etc), industrial production, manufacturing and services PMI, retail sales, etc. In most cases I tend to avoid any consumer sentiment numbers, or consumer confidence numbers, or anything that relies too much on a survey. But I modify this to suit my preferences.
I focus on the news that can actually have a bearing on near future growth, even if the market is not responding to the piece of news, I still write it in. So if the news is NMI (no market impact), if I feel it is important to growth, then I will still right in within these sheets.
This helps me to see trends in growth that can occurring and keeps me on the right side of the trend or can tip you off for a macro move.
For example, lets look at the United States bullish growth vs bearish growth sheet from February 2013 or so until the middle of March 2013:
Higher ISM Manuf (Feb 1)
Lower Unemp claims (Feb 14)
Higher Empire State manuf (Feb15)
Higher Capacity Utilization (Feb15)
Higher Existing Home sales (Feb21)
Higher New Home Sales (Feb26)
Lower Unemp claims (Feb 27)
Higher Chicago PMI (Feb28)
Higher ISM Manuf (Mar1)
Higher NFP (Mar8)
Lower Unemp rate (Mar8)
Higher Retail Sales (Mar13)
Lower Unemp Claims (Mar13)
Higher building permits (Mar19)
Lower Philly fed (Feb21)
As you can see from the beginning of February to the middle of March 2013, there was a lot of good US data, and very few bad US economic data.
This manifested itself in the markets with the USD going stronger versus the EUR, GBP, JPY, CAD. You can see in the chart that the EUR/USD and GBP/USD went down, and that USD/JPY and USD/CAD went up. Also, you can see that Gold went down, the S&P went up.
The reason you keep these lists is not solely to see the changes in growth or inflation, but also because of what this means for monetary policy! Changes in growth and inflation can cause the market to change its perceptions of what the central banks will do, which can cause big movements in the financial markets.
So that is what I do. I keep my list active for each currency and country. At the end of every day, I add in the economic data to each respective country if I believe it it is worthwhile.
The goal isn’t to become some nobel prize winning economist with great forecasts and projections for an economy’s GDP, etc. The goal, in my mind, is to focus on the news and economic developments impact on the market. To focus on what causes the market to move – the news, sentiment, global macro, scenarios, expectations, etc. To focus on what will ultimately cause the ODVE, MDMM and GM movements.
I do these by hand, but if you want you can keep them as digital files and keep them “in the cloud.” Or you can do both. You can have the handwritten version, then scan it and put it in digital form and have it in the cloud.
Habit #12 – Correlation Analysis / Sensitivity Sheet
I have revised this habit and split it into two parts.
Previously, I had the three columns – risk appetite, neutral and risk aversion, and rose in my little synopsis of the days action for each financial instrument and wrote down the closest scenarios to the market moment, etc.
Now I have split it into two parts.
There is still the correlation analysis/sensitivity sheet portion which focuses on:
1. How the market responds to news
2. Synopsis of the days action explained in one or two sentences for each currency and financial instrument
3. Very general macro scenarios that could occur and general comments on the world
4. Find the divergences in correlations and price action to discover beta, alpha and which markets can move or potentially play catch up
5. Notice any anomalies and interesting situations
Here is an example of my correlation/sensitivity sheet
Friday, May 31, 2013:
Will CAD, EUR or GBP consider some form of monetary easing or not?
NZD dropped a lot for second day in a row as RBNZ threatening interest rate cuts if NZD rises
Bonds did not rally that much on risk aversion. They are struggling to rally.
Will the US data continue to come out strong? Or will growth sputter even without Fed tapering yet?
How fast will the Fed taper? Will they keep delaying by a few months?
How much will the Fed taper? Only a small 10 bln cut? Or a bigger amount?
Will the US economy be able to absorb the taper and keep growing at a good pace? Or will growth drop precipitously?
Any risk aversion scenarios on the horizon?
I have mostly left out describing the closest scenarios to the current moment.
The reason I did this was because I felt that my correlation/sensitivity sheet was getting too cumbersome with all the different information on a single sheet. I felt it was getting difficult to quickly view the relevant scenario information.
So I decided to split out the currency pair and financial instrument specific scenario information away from the correlation/sensitivity sheet. I have moved that over to the next habit – Habit #12.
I do these by hand, but if you want you can keep them as digital files and keep them “in the cloud.” Or you can do both. You can have the handwritten version, then scan it and put it in digital form and have it in the cloud.
Habit #13 – Scenarios sorted into three categories
What I do here is create a sheet for every currency or financial instrument that you trade. Then on it, you create 3 sections:
The section on the top is called: Most Important / Relevant / Closest to Current Moment Scenarios
The middle section is called: Medium Probability Scenarios
The bottom section is called: Extreme Probability / Far Out Scenarios
Then in each section you have two columns. The left column are the bullish scenarios, and the right column are the bearish scenarios.
So in the end, you will have 6 “boxes.”
One bullish box and one bearish box for the most important / relevant / closest to current moment scenarios, at the top portion of the page
One bullish box and one bearish box for the medium probability scenarios, at the middle portion of the page
One bullish box and one bearish box for the extreme probability scenarios, at the bottom portion of the page
This helps to organize all the scenarios which you have on the scenario sheets. You organize them into those six boxes listed above. It is important to focus your efforts and time and thinking abilities on the scenarios that are most important and relevant and closest to the current market moment. But you should also keep in the back of your mind the medium and extreme probability scenarios, just in case they occur.
You also don’t want to be placing a highly leveraged trade betting on medium or extreme probability scenarios, because, well, they don’t happen too often and you don’t want to be hoping and praying for some wild event to save your trade and save your account.
Here are some examples of my scenario sheets sorted into the three categories/sections:
Most Important / Relevant / Closest to Current Moment:
1. rule out further interest rate cuts and rule out negative deposit rates
2. Higher economic growth
3. Higher inflation
4. Credit upgrade of periphery country
1. Negative deposit rate
2. Lower economic growth
3. Higher inflation
4. Credit downgrade of big European country
Medium Probability Scenarios:
1. Even lower peripheral yields
2. China decides to buy a lot more bonds from EZ
1. higher peripheral yields
2. Key EZ officials call for a lower Euro to help growth, and combat deflation
3. ECB engages in Quantitative Easing
4. China cuts holdings of Eurozone debt
5. ECB scraps OMT program
1. Some members on ECB call for higher interest rates
1. European banking problems flare up
2. A key Eurozone country will not go forward and proceed with austerity measures
3. Greece or other country exits the eurozone
4. Bad Auctions for the periphery countries where bond yields spike very high
5. SNB sells EUR holdings
6. SNB abandons EUR/CHF 1.20 floor
Most Important / Relevant / Closest to Current Moment:
1. Higher economic growth
2. Higher inflation
3. More Fed officials call for and vote for tapering QE
4. Fed tapers QE by decent amount
1. Lower economic growth
2. Lower inflation
3. Fed keeps delaying tapering QE by a few more months
Medium Probability Scenarios:
1. More drastic cuts in size of QE than the market expects
2. Modify thresholds to make tightening come sooner by raising the unemployment trigger, or lowering the inflation trigger
3. Fed says downside risks to growth have diminished
4. Fed says growth to accelerate
1. Expanded QE program
2. Modify thresholds to make tightening come later by lowering unemp trigger, or raising the inflation trigger
3. Fed says downside risks to growth have intensified
4. Fed says growth to slow
1. Global Financial crisis causes USD bid
2. Fed abruptly stops QE, and raises interest rates to reign in the bubble, and causes big drop in stock market and fans risk aversion
1. China decides to sell the dollar and let the world hear about it
2. US officials claim to want to make the USD weaker to help growth
3. Middle East countries recycle less dollars into the United States
As you can see, I have separated the scenarios into the 3 categories. This way I can see what are the closest scenarios to the current moment. I feel this is important in order to compress the scenarios that can move the market into a manageable number.
After all, what are the markets? They are a battle of scenarios – more specifically macro scenarios or news/sent/fund/macro scenarios.
These sheets may have to be updated very slightly, daily or weekly as the “current moment” changes and you discover new scenarios that move the market.
For example, in the current macro environment of low interest rates and a lot of QE in the United States, some of the scenarios for the USD would be: when is the Fed going to taper? How much is the Fed going to taper? Will they expand QE?
However, in a different global macro environment where the US economy has already grown strongly, and there is no QE at all, and interest rates are at 5% then some of the scenarios would be, is the Fed going to raise or lower interest rates?
Therefore, the most relevant macro scenarios change, as the macro environment changes.
I do these by hand, but if you want you can keep them as digital files and keep them “in the cloud.” Or you can do both. You can have the handwritten version, then scan it and put it in digital form and have it in the cloud.