A big problem for many traders is that they want to simply apply one trading strategy to a market all the time.
However, markets act quite differently depending on what’s going on technically and fundamentally. Without taking such factors into account, it’s easy to think that a strategy that loses money must be a poor one, but this isn’t necessarily true.
One such factor is the backdrop of central bank activity – and you really must make sure that you’re ready for this kind of financial news before it happens.
Judge on its own merits
There are many different pieces of financial news every single day, but not all are important. There are scheduled economic data releases and also news that’s more specific to an individual stock or as mentioned above, central bank policies. However, not all information is particularly important. There’s a great deal of information that’s just not going to be relevant to what’s going on in most markets (and particularly those that you trade).
It’s also essential to be aware that the importance of the various “tier 1” economic data releases waxes and wanes depending on what markets are broadly focused on. A great example of this more recently has been the lack of inflation in Europe and the European Central Bank’s explicit intent to act accordingly to stimulate inflation (and in theory growth). This has meant that when inflation data from Europe (such as CPI) has shown divergence from the pre-release expectations, a great deal of volatility has ensued in key markets (such as the Euro and Bund).
But it probably won’t be like this forever. So it’s going to be crucial to be able to identify the incoming information that is likely to be driving the markets and assess how your strategy might be affected.
The build-up and reaction
The other thing to consider is how the market moves in anticipation of expected news and what it does when this news is actually released. The old trading adage “buy the rumor, sell the news” springs to mind here. But it’s not always the case that markets will do this. It’s highly dependent on what the consensus expectation of the news is, if the news does come out as expected and whether there’s even a strong consensus of expectation at all. But you must consider what the market might do given certain scenarios and what it has done in the build-up to the financial news.
ECB nuclear option
So given Europe’s lack of growth, the European Central Bank had been expected to act with some form of stimulus and its meeting on Thursday 22nd January 2015 was seen to be critical in their roadmap. What came out of the meeting and the highly important press conference that followed, was that the ECB had agreed to commit to a huge bond buying program in the EU – this news saw bond prices skyrocket (and yields tumble) and sent the Euro down to levels not seen since 2003.
Here’s what happened: –
You can clearly see that in the build-up to this important piece of financial news, the Euro Futures became balanced. Identifying this as a possibility before the market started to balance and understanding even the basics mechanisms of balances, could have helped you to appropriately trade the build-up to the news and the news itself. Not accounting for the pending news however, might have seen you hammering away at the high and low end of the balance and needlessly losing a good amount of account equity in the process.
This was the Trend Jumper chart for the Euro Futures plan after the press conference: –
I’m sure you can see more than a handful very decent trades here!
Having a good awareness of what’s going on in the financial markets and why they are moving can help you to prepare for how to trade your strategy. You can’t expect that one strategy will work in all market conditions and so being ready for times when conditions are likely to be good and when they’re likely to be poor, can help translate a solid strategy into a winning formula.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.