Do you trade what makes sense or what makes profits?
News, fundamentals, rate statement, NFP… Can we really trade consistently based on what makes sense according to the central bankers?
Thursday 27th, 2020 between 8:30am and 9:10am EST, there are multiple fundies including a Fed Chair Powell Speaks. The USDx clearly positioned to make anything they want during the announcement. Most traders are placing stop orders in both directions. This trade is called a straddle. They are thinking the price will be exploding in one direction and what they will win in one of the positions will be bigger of what they lose in the other. It sounds good in theory however that´s not how market moves during fundamental announcements. On this article, I will talk about the anatomy of a fundie.
Let me first show you a picture of the USDx before the announcement and the EURUSD which is the market we will trade.
DXY
EURUSD
Take some minutes to see each chart. Imagine you are one of those retail traders taking a straddle on the EURUSD. Where would you place the stop loss?
If you have read some trading books or watch some youtube videos, you have been told that the stop loss should be placed above the highs or below the lows.
This is how the banks are looking at the EURUSD before the announcement:
We know that during the news, price will explode. The question is where it will go? We have to remember that the fundamental announcement creates an explosion of volatility so it´s a catalyst of price movement yet it cannot help us predict where it will go. At least in the short term. However, if we see the chart like the banks are looking we have very important clues on what the price can do when the news are out.
Let´s think like the bank. They need to fill most of the liquidity during the fundie. The liquidity is exactly at the areas of the chart above. So there is basically just 2 scenarios:
1. Price will crash to fill the 2 areas of liquidity below and then the price will explode to take the areas above.
2. Price will explode to fill the 2 areas of liquidity above and then the price will crash to take stops losses below.
Of course there is a 3rd scenario: Price will do nothing and moves sideways. It´s not probable during an announcement but it´s possible.
With these 2 scenarios, what can do to capitalize the movement? Think exactly opposite like retail traders. They are placing buy and sell stops close to the price. Doing the opposite means that we are placing limit orders where they are placing the stop losses.
If scenario one happens, these are our orders:
If scenario two happens, then these are our orders:
Sometimes to understand the market, you have to literally look at the chart upside down and do exactly the opposite of what “makes sense”.
Let´s see what happens after the announcement:
As you can see scenario 2 happened and our sell limits were filled and got to the two targets. One hour later, our buy limits were filled and we are waiting for the price to go to the targets above. Don’t expect the price to go immediately up because the price has already moved and there are no more announcements.
This is the moment when you should go to the gym, do some yoga or meditate. You understand what is happening so just let the price do its thing.
17 hours later the price went to our two targets above. You bank profits in both directions just thinking opposite to what everybody is thinking and doing. Remember that just 8% is profitable in this business. You literally have to change the way you see the markets. Don’t trade what makes sense, trade what makes you profits.
At the moment, most of the stock indexes are doing all-time highs. Is this something that makes sense? Heck no! The US GDP q/q is -31.7% last reading. We have never had this number. Yet the stock market is going up. Do I try to be right and short the market because of that? No! I trade what makes me profits and sometimes that is going against the fundamentals, against what makes sense.
Next time you go to a chart, ask yourself what are the retails and the big boys thinking and how can you capitalize on that analysis. Don’t try to be right, don’t trade what makes sense, trade what makes you money.
Thursday 27th, 2020 between 8:30am and 9:10am EST, there are multiple fundies including a Fed Chair Powell Speaks. The USDx clearly positioned to make anything they want during the announcement. Most traders are placing stop orders in both directions. This trade is called a straddle. They are thinking the price will be exploding in one direction and what they will win in one of the positions will be bigger of what they lose in the other. It sounds good in theory however that´s not how market moves during fundamental announcements. On this article, I will talk about the anatomy of a fundie.
Let me first show you a picture of the USDx before the announcement and the EURUSD which is the market we will trade.
DXY
Take some minutes to see each chart. Imagine you are one of those retail traders taking a straddle on the EURUSD. Where would you place the stop loss?
If you have read some trading books or watch some youtube videos, you have been told that the stop loss should be placed above the highs or below the lows.
This is how the banks are looking at the EURUSD before the announcement:
We know that during the news, price will explode. The question is where it will go? We have to remember that the fundamental announcement creates an explosion of volatility so it´s a catalyst of price movement yet it cannot help us predict where it will go. At least in the short term. However, if we see the chart like the banks are looking we have very important clues on what the price can do when the news are out.
Let´s think like the bank. They need to fill most of the liquidity during the fundie. The liquidity is exactly at the areas of the chart above. So there is basically just 2 scenarios:
1. Price will crash to fill the 2 areas of liquidity below and then the price will explode to take the areas above.
2. Price will explode to fill the 2 areas of liquidity above and then the price will crash to take stops losses below.
Of course there is a 3rd scenario: Price will do nothing and moves sideways. It´s not probable during an announcement but it´s possible.
With these 2 scenarios, what can do to capitalize the movement? Think exactly opposite like retail traders. They are placing buy and sell stops close to the price. Doing the opposite means that we are placing limit orders where they are placing the stop losses.
If scenario one happens, these are our orders:
If scenario two happens, then these are our orders:
Sometimes to understand the market, you have to literally look at the chart upside down and do exactly the opposite of what “makes sense”.
Let´s see what happens after the announcement:
As you can see scenario 2 happened and our sell limits were filled and got to the two targets. One hour later, our buy limits were filled and we are waiting for the price to go to the targets above. Don’t expect the price to go immediately up because the price has already moved and there are no more announcements.
This is the moment when you should go to the gym, do some yoga or meditate. You understand what is happening so just let the price do its thing.
17 hours later the price went to our two targets above. You bank profits in both directions just thinking opposite to what everybody is thinking and doing. Remember that just 8% is profitable in this business. You literally have to change the way you see the markets. Don’t trade what makes sense, trade what makes you profits.
At the moment, most of the stock indexes are doing all-time highs. Is this something that makes sense? Heck no! The US GDP q/q is -31.7% last reading. We have never had this number. Yet the stock market is going up. Do I try to be right and short the market because of that? No! I trade what makes me profits and sometimes that is going against the fundamentals, against what makes sense.
Next time you go to a chart, ask yourself what are the retails and the big boys thinking and how can you capitalize on that analysis. Don’t try to be right, don’t trade what makes sense, trade what makes you money.