Staying out of market chop is something that could save a lot of traders a lot of money. So recognizing when and where the chop might happen is a crucial skill to develop. There was a fantastic example of this on Thursday in the FTSE on what was dubbed Super Thursday.
It’s apparently ‘Super’ Thursday because for the first time the Bank of England published their interest rate decision, rate meeting minutes and latest inflation report all at the same time.
When there’s something big due out, you can be relatively sure that chop will appear sooner or later. Not infrequently there will be some kind of move – people squaring risk or taking a view before the new information becomes available – but all in all, the chances of decent market direction are low. This is because the new information the market is about to receive has a huge potential to alter market’s aggregated perception of value. In other words, the move is far more likely to happen after the news, so traders don’t want to get caught up beforehand.
Do your daily prep
It’s usually not too complicated to figure out when chop is likely to occur, but it may take a little bit of experience. The key is to consistently do your daily trading preparation so you learn what the markets are likely to take their cues from.
Learning which events are usually big ones on the economic calendar is a big first step. US Non-Farm Payrolls for example is one. Another, if you trade a UK linked market (such as FTSE futures), is the Bank of England rate decision or as it is now – Super Thursday.
The additional skill to pick up is figuring out what the market might be really focused on at the current moment. For example, in 2014 the European Central Bank had been particularly concerned by exceptionally low inflation in the Eurozone and had been strongly hinting at the potential for them to act to counter this if it didn’t pick up. This meant that for a period, EU and EU country inflation data (such as CPI) was creating a lot of movement in some markets.
See what happens
Of course, the premise that anything can happen in the markets always applies. A market could move strongly in one direction on a day (or part of day before a release) when you’re expecting chop. However, if this does happen it’s usually a very strong indication that there’s been a leak or confidence of a particular outcome of the pending news is high for some other reason. Spotting these opportunities early can be very profitable.
The point is though that you must see what develops as the day unfolds. There’s usually something you can work with, especially early on in the session.
This is what the FTSE looked like leading up to the BoE releases: –
You’ll notice that there were several attempts both up and down before the release and at the time, it felt like each one would be the breakout. However, in the Traderoom we’d already tried to get involved and recognized that the chances of chop were pretty high.
The other way to spot chop as it’s happening is by using an indicator to give you the heads up such as the Netpicks Squeeze Indicator.
Have the discipline (or sense) to stop
Quickly spotting that the market conditions are likely to be turning to chop can make it a great deal easier to stop trading until things pick up. If you’ve lost a little capital by testing the market out, it’s not the end of the world. It’s far easier to accept small losses and let them go before they become irresponsibly large. Once you see the conditions aren’t great, show yourself the red card and stay out of the market chop.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.