Order Flow Scenario Analysis

Quote:

Originally Posted by redbaron1981 Since your post about sentiment/fundamental analysis it now looks like I need to design some kind of Model for assessing underlying economics of a country, so as to be able to create a bias to wards how I will trade that countries currency, and to decide if that currency is over/undervalued. By what I read in your posts I think I may be correct in saying that you also use something similar?

Well I am not sure what you mean by a model. I don’t try to complicate things too much. I try to use as little math as possible. Assessing the underlying economics, news, and things like that can can be useful, but I usually like to make sure the market is sensitive to those pieces of information that you are looking at. Yes I like to use sentiment/fundamental analysis. But it means different things to different people. There is no one way to view sentiment/fundamentals, nor is there just one way to trade order flow based on it. I was just merely trying to explain the way I view the markets. Take from it what you can. Find the inefficiencies in the markets, but also find the inefficiencies in my arguments/posts as well, if you can spot them

Yes usually I like to stay plugged into the information flow and have a deep knowledge about what is going on around the world and with each country’s currency pair that I like to trade.

As far as pip values. You will never be able to get an exact pip value. In theory it does exist. Don’t beat your head against the wall trying to find it. It is not the panacea that you may think it is. Not even the big banks who have access to better order/information flow know the exact pip fundamental value. So I would not bother with that. It can lead to a road of frustration and unfulfilled expectations.

Usually what I like to do is this:

For example, I like to say if this thing, and this thing occurs, then the market should move 30-60 pips. And if this thing and this thing occurs, then the market should move 100-150 pips. And if this other particular order flow scenario plays out then the fundamental value has changed by approximately 300 pips in so and so direction, so the market should move that way fairly soon. Things like that. I like to generally have some sort of pip range that I expect a move to go. Of course that range can be extended/shortened on the fly, and within seconds as you take into account new information.

So for example I like to do scenario analysis. I do it every day, and sometimes every hour and every second. For example I would ask myself what would happen if the ECB did an emergency rate hike of 50 bps? What would happen if the ECB did not hike rates? What would happen if the ECB hiked rates and it leads to a drastic slowdown in growth and leads to another flare up in the sovereign debt crisis? What would happen if the Fed abruptly ends QE2? How would the liquidity distribution, order flow, expectations be adjusted in such situations? Do you think the fundamental value of currency pairs would change? And if so, by generally how much? How can stops/option barriers, etc play into these mispricings?

The market has so many questions you can answer. Trading is truly a work of art.

Hopefully that helps stimulate some thoughts.