Ransquawk

Why waste a chance?

I hear a lot of traders who say they never trade or hold a position over certain economic releases and some who even say they avoid data releases all the time. When you add up the amount of time that takes up, the limiting of opportunities means that profitability must be affected.

It seems to me that rather than avoiding those time, particularly as more experience is gained, the need to be embraced and viewed as a chance to make money.

I have often been an advocate of a balanced methodology when it comes to a trading strategy. I don’t personally subscribe to slavishly following chart formations, I don’t agree with ignoring them either.

In banks, interbank traders, as I described yesterday, only really use charts as confirmation of their own view of support and resistance levels not having time to be involved in more intricate studies.

There is little doubt that holding a position over a significant data release can be a scary experience, but it is not something that needs to be feared. It is far more likely that a position will be ruined by an unforeseen announcement or event over which the trader has no control or forewarning. I would say that more losses have been incurred by events that are not expected or scheduled than anything inflicted by employment, inflation or growth data.

Proprietary traders use every piece of information

forex comparic

Yesterday, I mentioned the two types of trader found in banks. Interbank traders are the guys (or gals) who are often derided by retail traders for searching out stop losses and generally ruining the market even though they are also the people who provide the liquidity we all love.

Proprietary traders are more like longer term retail traders. They are very disciplined in their trading style but differ from us in one highly significant way. They use every piece of information they can lay their hands on which makes them every “social” in their methodology.

Yes, they use charts but to a large extent they will rely on others to give them an in depth set of levels. They exist in an environment where a significant number of asset classes are traded whether they be bonds, equities, commodities (hard and soft), and precious metals. Conversations and snippets of information help them to build a picture and the FX market tends to be the glue that holds the entire market together.

Interest building in a country’s equity market, a rise in long term yield in another’s bond market, a rise in the gold price due to some increase in global risk, each of these and more provide pieces in a jigsaw the trader is creating which will form part of his decision-making process. This brings me back to my original comment about making sure every opportunity is capitalized upon.

Liquidity and value

During the month of April, well until the last week anyway, the common currency had been languishing in a narrow range prompting speculation that the volume of liquidity banks were providing to the market had finally tipped the euro into not being a suitable trading currency.

Then, the market changes its view almost like a white whale or a super tanker turning in the water and we see volatility return. However, there is very little two-way business in the euro now as traders all seem to be thinking the same way. Everyone gets long and drives it to 1.2520 or thereabouts then everyone bails out and we see 1.2080 like yesterday. In between we have days, even weeks, of 40/50 pip ranges. There is ample liquidity to deal with any “intra-range” news story and there is little point in waiting for a “game changer” or “hail Mary” trade as i) you could wait a long time and ii) there is no guarantee that you will be on the right side of the move since no one can anticipate a “black swan”.

Liquidity and value are the new watchwords to aspire towards. Liquidity in order that we can trade both safely and effectively. Yet we also want to see value, “bang for our buck”. Sterling can provide the value, but liquidity can be an issue in times of even moderate volatility.

For some novelty, look at the AUD, NZD and CAD. The “commodity currencies” have ample liquidity, are driven by easily understood factors and can provide value. It isn’t always about the Euro, Yen and pound and value needs to be searched out and appreciated.

Leave us a comment!

Ransquawk