Hi, Friends, It’s been an interesting market. There’s an enormous amount of headline risk, mostly having to do with Europe (Greek elections on Sunday, multiple sovereign downgrades, concerns over bank solvency, just for starters) and because of the uncertainty there’s been some aberrant action. On the foreign exchange desk where I work, afternoons have been quiet, and although there were occasional trades to be done today after London went home, most institutions are planning to go into the weekend fairly close to home on their short term positions, and have already squared up in many cases. There are two large televisions within easy viewing distance, and one was tuned to golf, one to soccer.
Just after 3 PM EDT, a colleague flashed a headline over our internal communication network that a news service was reporting that the G-20, which meets next week, had agreed to coordinate in order to provide liquidity to banks following the Greek elections. This should not have been a big deal, or even really news. It was, however, clearly a “risk on” event. In a thin market, there’s a huge advantage to those who grab first, and we immediately bought all of the Euros that we could. Other desks, both within my firm and at other shops, were buying metals and equities, including equity futures. The result was a very rapid spike up; in the E-minis, the action took the contract from 1314 to 1328 within five minutes or so.
It’s tempting, in a quiet market, to get a bit lazy about stops. Todd always emphasizes the importance of moving stops down on profitable short positions as the price action permits, and while in this case the fill on a trailing stop would no doubt have been sloppy, it would have been far preferable to being out ten points without even knowing what bus had just run over your wallet. Even if you’re glued to CNBC or Bloomberg TV, it’s going to take a moment for them to transit the news; by that time, institutions will have taken the opportunity to hoover up liquidity, forcing everyone else to pay up.
As TradingConcepts students, we trade using the Market Flow Analysis Method, and that method works and helps us to make consistent profits. “Consistent”, of course, isn’t the same as “constant”, and there are going to be be times when a headline, or the activity of a large institution, will take even the perfect trade setup and generate a stop. If we follow Todd’s guidelines for position sizing and risk management, these are just a cost of doing business. If we ignore these rules even once, we’re exposing our accounts to the possibility of a really serious loss. Placing a stop, and adjusting it as price action dictates, should be as automatic as taking a trade and leaving a profit level.
Tomorrow is option and futures expiry; given the uncertainty around the outcome of the Greek elections on Sunday (although at the moment the consensus is that the center-right will be able to form a government, which is expected to be positive for equities), I would anticipate that the FX market will be pretty quiet. There’s still the possibility of a headline out of the blue that can instantly change the character of the market, and it might not be a bad idea to trade a bit smaller. There will be plenty of opportunities going forward for those who have all of their cash remaining.
Best of luck!