I just went through your news trading section. There are some instances that we can fade the stops being tripped and other times we go with the same direction. How do we determine if we should fade or go with the flow? Hope you could help clarify.
Determining whether to fade with the stops or “go with the stops, for a sent/psych shift move”, depends on a number of different things:
It depends on how big the stops are
What the sensitivity level over the past few days or weeks has been to tripping the stops and various news events
And most importantly: What the news/sent/fund/macro players are doing, and the battle of macro scenarios. It depends on where the “macro exhaustion” point that I like to talk about is reached. If the market reaches a macro exhaustion point and the participants betting on a particular scenario are mostly committed and that scenario cannot generate much order flow, then the tripping of stops can exacerbate the mispricing and thus present a fading the stops type of opportunity. I also try to make sure that there is an opposite macro scenario that the people fading the stops can play for. So as one macro scenario is pushing the market into the stops and becoming exhausted, the other group of macro players can fade those stops because they believe an opposite direction macro scenario is also in play.
Various examples include:
GBP/USD from this week, where you could have faded the topside stops multiple times. There was good GBP data that pushed the market higher, as the bullish GBP macro players were doing that. They were betting that perhaps the stronger data could cause a faster ending of the forward guidance. But there is also another group of macro players that were willing to short GBP/USD, expecting that the bullish GBP data is not going to change the BoE view, so any rallied of 50 or 100 pips and tripping of topside stops are shorting opportunities. And there are bearish macro players that are expecting good US data and for the Fed to taper, which are causing them to short GBP/USD on a tripping of the topside stops. You have that battle of macro scenarios in play. Neither side can win for too long with the current information flow. The macro players are able to push GBP/USD higher by 50 – 100 pips and trip topside stops, but then it reaches macro exhaustion as the BoE has not changed their view. And the bearish GBP/USD macro players betting on stronger US data and Fed taper can only push prices down 50-100 pips or so before those macro players get exhausted as well, as the Fed has not conclusively indicated a Sept taper or big, continuous taper, etc.
Another example is the S&P from this week. Trying to buy a fresh tripping of the topside intraday stops, was not a very good reward risk trade most of the time. The bullish macro players from the improving economy, lack of imminent Syria action, etc were able to push prices to trip topside stops, but they usually suffer from macro exhaustion. So fading the topside stops is a decent strategy. As there are bearish macro players that want to take profits, bet on Syria crisis escalating, bet on Fed taper or higher yields hurting the economy, etc.
The markets are a battle of macro scenarios most of the time. As the information flow changes, macro scenarios and expectations change, the market enters different states. Some states are conducive to fading stops, others are conducive to buying dips or selling rallies, other states are conducive to buying fresh breakouts or shorting fresh lows, etc. It just depends on the pent up news/sent/fund/macro order flow and how much they can commit to a certain scenario compared with the opposite side macro order flow. There can be market positioning elements thrown in as well.
You try to identify the discrepancy between the current market expectations and the reality of the situation.
A lot of trades in the financial markets depend on what scenario are you betting on? What scenario can cause your trade to profit and to lose? That is what I am constantly asking myself every day. If you get the correct scenario, then you have the best market allies in your favor as they are supporting your trade and moving the market in your favor.
As Livermore once said:
I can tell you after the market began to go my way I felt for the first time in my life that I had allies – the strongest and truest in the world: underlying conditions. They were helping me with all their might.
For the “go with the stops/breakout” type of move, again I am usually looking at the sensitivity of the market over the past few days or weeks, seeing if it usually has gone with the breakout. And I am also interpreting the current moment information flow to see if there are any fresh catalysts, so that if the stops are tripped, I can try to analyze to see if there is more potential news/sent/fund/macro flow to enter the market in the direction the stops have gotten hit. And I try to determine market positioning elements to see if the market is stuck short or long and if traders will bail out of their positions aggressively once the stops are hit.
Sometimes you are not completely sure if there is enough current news/sent/fund/macro flow to cause sent/psych shift, but are relying on a near future change in expectations, news, catalysts, etc to push the market further in your favor.
I am not sure if there has been any recent clear cut examples in the forex market for these types of breakouts on the daily charts. (although there are on the intraday charts for smaller moves) There have been some in the stock market with NFLX, FB, and BBY.