Last updated on April 22nd, 2020
In some respects, trading is a game of moments and there are key moments for markets, which have the potential to generate some very good setups indeed. Some of these moments are technically generated and based on trading data from the market that you’re trading.
Some of these moments are derived from macro influences such economic data releases and central bank policy. In either case, it’s a good idea to run through at least the likely possibilities for what the market could do before the key moment is upon you.
I’m a Day Trader – Do I Care?
Erm, yes. Yes you do. Or at least, you absolutely should care.
We all know that there are some events that move the markets considerably and some that don’t. Sometimes these events are obvious such as central bank meetings and US Non-Farm Payrolls.
But equally, there can be other information that market participants look to depending on what’s happening at the time – e.g. housing data over a housing crisis or inflation data when inflation is coming in too way low (recently EU CPI for example).
If you know what the markets are likely to move because of, you can pinpoint times when there’s a good chance of seeing a decent amount of movement and plenty of opportunities. By keeping up with the news and economic data releases in general, you’ll get a much better feel for what is currently driving the markets.
Opportunities for What?
Trade opportunities themselves are not by definition positive or negative, they are neutral. More movement means more good trades, but it also means more bad trades too.
Think about it for a moment.
If you buy the market and then it ramps up a gazillion ticks, someone had to sell it to you. Of course, they may have been exiting a trade, operating over a much longer timeframe or taking a spread position, but the fact is that they could have sold it to you far higher than they actually did.
My point is this: just as these key moments provide opportunities that turn out to be great winners, they also hand out big losers too.
On another day, you’ll be the guy who sells the market just before it rockets higher. Being ready for markets when they are likely to experience greater volatility means you’ll know what to expect and have a plan for what to do.
You probably won’t always win, but at least you won’t fluff your lines.
Remove Your Short-Term Blinkers
Day traders, particularly those who tend to focus on either a single or small number of products, see many different types of market condition in their products. This has its advantages and its disadvantages.
On the one hand, they’ll intimately learn their products (if they have enough desire to of course), while on the other hand, they’ll have to endure periods of sub-optimal conditions and be quick to react when things change.
Reacting quickly to change is much easier when you’re prepared for it.
If a market is in a lull, you need to be quick to switch gears when things begin to move fast. A large target yesterday could be a tiny target today. If you don’t recognize that you need to switch to a zoomed out view of your chart, you’ll probably be out of sync with the market.
At best, this means missing out on some decent profits, but at worst you can find yourself losing a great deal of capital.
Always try to look to see what technical levels there are outside of what you feel would generally be in reach on days with key releases due out.
Higher Timeframe Participants
When key market moments occur, other types of participant are likely to be present and active in the market.
If there’s a central bank meeting for example, participants operating on a longer timeframe are likely to move the market if there’s a degree of confirmation or denial of policy action. If a central bank acts, markets move (some more than others of course).
When these players that are acting on a higher timeframe are active, there are likely to be bigger movements as a consequence.
These guys aren’t interested in yesterday’s closing price or even yesterday’s high or low.
No, they’re interested in a test of the last major swing high on a daily chart at least or if the market can get back into the long-term balance area below for example.
Longer-term traders will be thinking in days and weeks rather than in ticks and minutes.
A Variety of Options
If you have a number of possibilities in mind based on various outcomes of a particular economic event, you’ll be far better prepared to identify and act on movement that fits a particular scenario. At the very least, you should consider three options for the outcome of an event.
The first is that it comes out better than expected, the second is that it comes out worse and the third is that it comes out broadly in line with expectations.
Technically, there are going to be a variety of possibilities for what the market can do based on the outcome.
However, the reaction to the news isn’t always going to be quite as straight-forward as it might be.
For example, many people make the mistake of thinking that when a number comes out better than the prior number or even better than analyst expectations, a market that would normally go up because of this should go up. This may be the case, but trading needs to be rather more dynamic on many occasions.
There may have been revisions to analyst expectations leading up to the release.
There could also have been a rumor of a much better than expected number which in turn moves the market aggressively higher and then it turns out that the number is only slightly above the original projections – hence the market then drops.
In all cases, a clear idea of major market decision points (read: important levels) and major subsequent targets should be noted in order to be prepared for the potential for larger than normal moves.
Economic Release Scenarios
Being ill-prepared for a market doing what you don’t expect and being slow to react or worse still, trying to trade it in the opposite way to how you should, is likely to be a problem on any given day.
It can lead to account blow-outs or simply a feeling of incredible frustration at not recognizing the market’s behavior early on. On days with the potential for very big moves, the situation is only going to be worse.
So make sure you are ready for the different possibilities and instead look to profit from them when you see the market in a way that you’ve already considered.