1) is it safe to assume you don’t trade the Asia session, since it is typically low volatility (with the possible exception of some AUD and JPY pairs)? I’m thinking it would be best to reserve this time to do the habits and perhaps, trade some news events (BOJ, RBA, China dat, etc.) if it generates volatility. However, for some I figure this is the only time they cn actively day trade (after their workday).
2) Do you keep current scenario sheets or is this all done in your head now? Do you have recent ones you can show as examples (the ones in the course are a bit dated)?
3) would you say that ultimately what we are trying to do is frontrun real money flows? Is that pretty much what it comes down to….getting in on expected market moves based on where the future trade flows and capital flows and one way transactions (hedging, business transactions, etc.) will go? Isn’t that what all the news out there is….fundamentals which will influence trade (importers, exporters and their hedging) and capital flows (local stock markets, interest rates, what their respective central bank will do to interest rates, etc.)…and then we try to get ahead of that? I’m talking fror more longer term trades cause as we know, much can happen intraday that simply cannot be explained thru news.
I’m curious to what your thoughts are on this. Thanks.
1. I operate under the principle that I can place a trade, even a leveraged futures or forex trade, at any point in the day, at any moment in time, because I believe that an explosion of volatility, or shifting expectations/scenario, etc can occur at any point in the day. Now, if I had to go back and break down where the most trades were initiated and exited, then most of the time they would fall between the 4am – 12pm EST time frame. So the European / NY session. That would be the core trading session where most of the intraday trades and even swing trades are initiated from. From time to time, it happens that I initiate short term trades or swing trades in the late NY session (12pm – 5pm EST) or the Asian session (5pm – 11pm EST). In fact I went short AUD/USD on Friday, January 10 before the 5pm market close, around 4pm-5pm, because I thought there was a swing trading inefficiency, and didn’t want to wait until the next week. I had to hold through the drawdown on Monday when the AUD/USD rallied, but since the reasoning and macro catalysts for the trade still existed, I held through it and the price dropped later in the week.
I am not here to say that opportunities don’t exist during the Asian session. They most certainly do. Swing trades, since they are attempts to capture MDMM moves of several hundred pips or 1,000 pips, etc, usually use wider stops, so you have more leeway when you place them. So the swing trades can be placed at any time, especially if you use standing limit orders or buy/sell stops to enter (if that is your style). Comparing the intraday tactical trades that last a few minutes to a few hours, then the European/NY session between 3am – 12pm EST definitely beats out the Asian session for maximum opportunity set.
2. I do update the scenario sheets from time to time when I discover a new scenario or catalyst that I was previously unaware of. Also I do read my scenario sheets again if I feel it helps me to go over the scenarios again and find the key 3-6 elements/forces moving each market. Some of the other ones I keep in my head. Usually, I will post little snippets of my updated scenario thinking while I am writing in the daily habits in the master files, etc. So my thinking as to the bullish and bearish scenarios are in the weekly habits that I post. If you are looking for a cleaner list, then I will post some updated mini scenario sheets over the weekend of what I have.
3. I think some people get confused with “real money” flows, vs macro, etc. Let me attempt to put an end to it. What directional traders are ultimately trying to do is: capture the volatility (in the form of intraday volatility, ODVE, MDMM or GM movements). Now volatility can be caused by all sorts of different things. Most of the volatility, say 50% – 95% is caused by what I call the news/sent/fund/macro forces. For currencies, I would call it “macro” instead of “fundamentals.” For stocks, if there is some sort of bull market, or depending on how big the fundmental shift is, then company specific scenarios, expectations and “fundamentals” can come into play to cause volatility in the specific stock, or industry group. So that is why I added in the “fundamentals” to the news/sent/fund/macro. For example for today, on Friday, January 17, 2014, American Express (AXP) rallied from 88.00 to 93.00, while the S&P was flat. Why did it rally? Because there was a company specific scenario/fundamentals/news that came out that shocked the previous expectation of the market participants.
Going back to capturing the volatility: Since a lot of the volatility is caused by the news/sent/fund/macro forces, you want to know how and why they trade. They trade predominantly based on expectations and scenarios. If someone, or a group of market participants is long 10 billion of the EUR/USD let’s say, they aren’t long that much because of a tech breakout or moving average, etc (in most cases). Therefore, they have a certain expectation(s) attached to their trade. They have a reasoning as to why they have that trade on. Thus, they are betting on a scenario. Similarly, if a group of market participants is going to sell 10 billion of EUR/USD to go short from being flat, then they would initiate such a position due to certain expectations and betting on a scenario. Now, a scenario could include a tech breakout or moving averages, etc. That is a form of technical analysis scenario. But the scenario I am more referring to a macro scenario. A news/sent/fund/macro scenario.
For every single market – both liquid and illiquid, whether it is the EUR/USD, S&P futures, General Motors stock, real estate, etc, you can create scenario sheets. You can analyze the current moment, what moved the market in the past, and create a list of scenarios that would cause the market to move both up and down. These scenarios involve shifting expectations. Shifting expectations cause volatility.
Whether the volatility comes from a macro fund, a “real money” fund, or anything else. It doesn’t matter. I just lump them all together into the “news/sent/fundamental/macro” order flow. You just want it to either shock the market, or a gradual shift in expectations. If a macro fund or group of macro funds dumps $10 billion of USD/JPY and causes the price to drop 150 pips, or whether a “real money” pension fund/insurance company dumps $10 billion of USD/JPY, it still causes the same volatility. So you don’t really care who causes the volatility. What a trader is interested in, is the reasoning behind the trade and what would cause the volatility to happen. In the case of hedging, corporation transactions, etc, some of them are difficult and uncertain to predict and find their impact on price. Which is why I wrote in: http://orderflowforex.com/what-you-need/
“You are looking for identifiable, massive order flow. If something is moving the market, but you don’t know when it is happening, you don’t know what price it moved the market from, don’t know how much it moved price, and don’t know how spread out or how concentrated it is, then it doesn’t do you much good”
So that is why I focus on the news, sentiment, macro, expectations, scenarios, etc. I can see the market impact of the news with my news impact recording method. If a currency pair moved 100 or 200 pips in a day, I can use my scenario sheets and information flow interpretation advantage, to see what shift in expectations or scenario caused the movement.
I added in the news/sentiment, because well, if you see a big volatility movement, you want to find out why the move happened. So you check the news, check the information flow. You may have predicted it or visualized it in your head, but there are other market participants that are looking for more concrete confirmation before aggressively placing big orders in the market.
And the addition of stops/barriers, and market positioning help as well. Sometimes markets can move big amounts due to profit taking / short covering and extreme positioning unwinding itself. That does happen and it is important to keep track of.
With regards to what goes on intraday that cannot be explained by the immediate news, then I just use the scenario sheets / macro model. I say for instance: given my interpretation of the current information flow, news, macro, etc, EUR/USD should probably be trading a few hundred pips lower, so if it breaks out to the topside, even though I may not be able to explain it exactly using the news impacts, I know that there exists potential for bullish macro exhaustion, so I shouldn’t try to buy the upside breakout, etc. I may say something: “well perhaps there weren’t any big macro sellers betting on the lower EZ inflation or sluggish growth before, but now that the market moved up 150 pips, there might be some that come back and sell it. Or there weren’t very many EUR/USD macro sellers based on the Fed gradual taper of 10bln per meeting, but if the EUR/USD rallies 150 pips, there might be some macro sellers based on that scenario.” Something like that. So in the currency pairs and many other financial instruments, I mark off the charts every day with either “DO NOT BUY TOP TICK, DO NOT SHORT BOTTOM TICK” or both. Then I just sit and wait and interpret more information, check the correlations/sensitivity between markets, read more good and intelligent articles/information flow and go over the scenarios again to see if I can add a new scenario or insight.