1) Stop loss levels interfering with several other causes for price movements in many other pairs
I’m far from that I could say I have a lot of experience regarding stop hunting, hence comes this question that might seem a dumb one for you, but for me, I think this is an interesting question worth thinking about.
Since all the currencies are interconnected, especially the 8 most important ones (based on size of their economy) that you trade; I’m wondering whether looking at “stop levels” is worth it.
I mean, if I see a SL level that might be triggered, the buying/selling force that might aim to trigger that SL level could be meagre compared to all the other forces in the other currencies. Especially because there are lot more pairs that make up from these 8 currencies.
This is 28 fx pairs altogether that can be constructed from the 8 most important currencies.
Even if we dismiss the minors, there are lot more pairs in which there could happen some movement, which in turn influence all the other pairs.
So e.g. if there is a SL level in EURGBP, there could also be SL levels in proximity in the other pairs which SL levels could deter the price to reach the SL level what you watch. Not to mention the N/S/F/M factors that might take place at that time in the other fx pairs.
And even if your SL level is breached, the reason for that could be another SL level (or other N/S/F/M factor) in another pair or several other SL levels (N/S/F/M factors) in several other pairs.
So when you see a stop loss level and think you could try to bet on a SL-hunt or SL-fade scenario, in reality, what will happen (whether the SL is breached or not) might be nothing to do with the forces related to the pair what you’re watching – maybe all the forces that caused the SL to breach (or not to breach) are related (wholly or partly) to a host of other possible causes related to several other fx pairs.
This reasoning could also relate to option barrier levels, although maybe to a lesser extent.
What do you think about this?
2) Possibilities of big gains in trades of emerging markets’ currencies?
I deliberately don’t write a separate email about this, since maybe this question doesn’t qualify for a detailed answer, since you’ve clearly stated in the Mastery Course that you don’t trade minors or emerging markets’ currencies because
- it is enough for you to track those 8 currencies that you trade, and
- those 8 currencies provide plenty of opportunities, and
- it would be too hard to follow additional pairs, and
- the liquidity of them is not so deep, and
- because of the shallower liquidity there is bigger spread and slippage.
These are quite a few relevant causes for not to trade the currencies of emerging markets.
Even so, let me ask you what you think about the trading of currencies of emerging markets.
Last week we’ve seen huge market movements for several days in a row. These are the market moves that you are looking for; since these are multi-day market moves (if not the beginning of a longer-term trend, a GM).
Even if one would be hesitant about entering a trade on the first day of the news articles regarding the money outflow from emerging markets, if he would open a trade a whole day later, there were really big movements in one direction through several days afterwards.
These moves might not be translated to so big of a gain if one would try to capture it only via the majors.
So what do you think? Is it worth to track the currencies of emerging markets, or at least read the major news regarding them; or this one occasion of a big price move doesn’t negate all the reasons why not to trade these currencies?
1. Many of the currency pairs are kind of related through triangular arbitrage. I don’t know all that much about it, since that would be going down the path of more quantitative trading and algorithms etc, which is not my specialty. My specialty is interpreting the information flow and global macro trading.
I do think there are situations as you said where there is a SL level in one currency pair, but a SL level or barrier in another currency pair helps prevent the SL level in the first currency pair from being hit. And that if a SL level is breached in say EUR/JPY, it could be due to action in USD/JPY, or even EUR/AUD, etc. I am not sure where you want to go with this.
I would assume to break it down:
There could be various reason why a currency pair does the intraday movements you see on a chart.
One reason could be pure macro related to that currency
Other times it could be stop losses getting hit in a related currency pair
These are all valid observations!
There are times I write down in my daily habits that the reason for a currency acting strong or weak across the board is because of some major action in a just a few other related currency pairs. I do write in those notes from time to time. I am just not sure if I want to dig even deeper into the Stop losses, etc.
With the Mastery Course, I digged deep into my knowledge and history of markets to figure out all the major reasons why a SL can get hit, and different types of stop hunts. Eventually I hit a wall and felt that I shouldn’t be trying to dig deep into the miniscule price movements of 5 pips, 10 pips, etc. I felt that my time was better spent explaining the more macro trading and news trading where someone can capture the 50 pip, 100 pip, 300 pip movements in the market. I felt that was a better use of my time and still do. I don’t want to go back to the “stop hunting bubble.”
2. I remember one top hedge fund manager said that he deals in “anything that trades.” Now he is dealing with large amounts of money, so he has access to the more exotic currencies, and financial instruments. The general rule is that you deal in anything that trades as well! You just develop some principles in order to sort out the promising instruments vs the ones that are not worth your time. As a general example, I like to trade the GBP/USD rather than the Turkish Lira because the GBP has reasonable spread (.5 pips – 2pips) and if there is a macro catalyst, then good volatility movement, etc. I don’t have to worry about that the government is corrupt or they are shady financial dealings, excessive political turmoil, etc. So if I want to, I can use leverage to trade the GBP/USD. With the Turkish Lira, the intraday action can be choppier, and spreads higher, and since it is more volatile and higher spreads, etc, I can’t use leverage with it, so I need to take smaller position sizes, which means I have to try to capture larger movements on the daily and weekly charts. (which there isn’t anything wrong with doing that, I am sure there have been traders who made money on the Turkish Lira, etc)
I follow a lot of instruments right now. The 8 currencies, which is around 20-30 currency pairs, futures markets like S&P, bonds, etc, and I have also expanded into individual stocks as well. I just feel that my time is better spent on more futures markets, and individual stocks, rather than using my precious time analyzing the Turkish Lira or Thai Baht. Because I can place both leveraged intraday and swing trades in the market I currently follow. If I was dealing in the Lira or Baht, then I couldn’t use leverage, so I would only be limited to the big macro moves, which may only occur 2-3 times a year in those currencies.
I am a trader that searches for the clean volatility wherever it can be found. Clean volatility on both the intraday and daily charts is my preference.
I have been watching a chart of the Turkish Lira once or twice a day to see where it is at, ever since the market got sensitive to it a few weeks ago. So I follow the developments in the emerging market currencies if I believe the instruments that I follow are sensitive to them.
Follow up Question:
I’ve come up with this because I’ve read somewhere that you would have to more eagerly try to find reasons why a method could break down as opposed to try hard to prove why it would work. So I’ve raised this question whether I should stop dealing with stop loss levels not just because global macro trades could yield bigger profits but also because maybe stop loss levels do not work at all due to the reasons we are talking about. Maybe this is an overstatement, I don’t know. I’m not sure how reliable those levels are – whether it is worth to deal with them as a beginner. I’m a beginner and thought that applying the ‘stop hunting’ tactics would be easier to get a grasp on trading profitably. It would be easier (compared to news and/or global macro) to start the trading carrier with stop hunting, I thought, but really I’m not sure how reliable those stop hunting tactics are…
I don’t remember what I exactly wrote. If I wrote something along the lines of trying to decipher why a trading strategy works, and why it would fail. The market environments where it would work, and the market environments where it would fail. That is what I like to do and helped me in developing my own market philosophy and strategies.
As a simple example of say someone who plays for breakouts using some moving average crossover. Well there would be some market environments where that strategy works out and the market breaks out, the moving average crossover signals a trade and they get it a bit late (due to laggy moving averages), but they still make money because the volatility was so big and sustained. But there would be other market environments where such a strategy would not work well, such as if it was a stop hunt, or the market reaches a macro exhaustion point and the scenario is fully priced in.
So I took a look at so many different types of traders and asked myself: What are they missing? How can they do better? Eventually I discovered and developed that the information flow and macro element was a crucial component. If a market is going to break out significantly, and sustain it, well there must be some sort of expectation shifts, macro shift that occurs to cause such volatility in the market. A pure chartist may not pay attention to such information flow as they do not look for the “why.” But as an order flow trader, I look for the why a market can move a lot of the time.
So when I look at a new type of trading strategy, I ask myself: What underlying market principles is this strategy based on? Is it based on anything regarding order flow, liquidity, volatility, information flow, news, sentiment, expectations, macro scenarios, etc? Or is it based on things that are purely derived from prices only such as technical indicators such as moving averages, stochastics, etc? I much more care about trading strategies regarding the universal principles of speculation as I believe them to be.
And eventually I broke down the market moves into three types: the One Day Volatility Explosion (ODVE), Multi Day Momentum Move (MDMM) and the Global Macro Move (GM). That helped me to visualize that the macro scenarios can be exhausted. So every time I am in a trade and it is in profit, I ask myself: Is this trade just good for an intraday move? A one day move? A multi day move? A big global macro move? That has helped me enormously knowing that type of market philosophy.
I use stops every day. I label the topside and bottom stops using the simple high/low over the past few hours or past day or so (the chart based approach). Their power is usually more useful when a trader adds in some expectations, some news/information flow, and is thus able to form the “macro model”, such as knowing when to buy the dips or short the rallies. I use the phrases “Do not buy top tick” and “do not short bottom tick” labeled on my charts to help visualize the macro model.
I would say, I don’t “hunt stops” anymore. If I am in a trade and expect it to trip topside stops lets say, the reasoning behind it has less to do with a “stop hunt” and has more to do with a macro reason, or market sensitivity reason. So I highly value news, information flow, expectations, macro and sensitivity signals, rather than trying to predict when a big player is going to “hunt the stops.” I still use the phrase “hunt stops” because one of the reasons why stops can get tripped, is because they get hunted. Other reasons are the macro is gradually pushing into the stops.