How Could We NOT Talk About the Fed Today? By Martin Tillier I was going to write a piece today about Bernanke and the Fed, but I held off for two reasons. Firstly, in the short time I have been here I have discovered that Tycoon Report readers are tuned in and informed about markets. Given that, the chances are that by the time you get to reading this you will be thoroughly sick of reading about the Fed. Secondly, my time in the Forex market has taught me that, in times of extreme volatility, it is better to react to the actual news than to try to anticipate it. In this case, I believe it will be better to wait even longer, let the market settle and look for a correction back the other way before trading. This touches on two of the things that I picked up during twenty years of being a paid professional in the FX market, and that I have learned apply to all markets to varying degrees: First, don’t try to beat those on the inside when speed of execution is of the essence. Second, that traders, like radio talk show hosts, are prone to overreact. From The Outside, Your Reactions Are Delayed The reason not to try and outgun the paid traders when it comes to speed is fairly obvious. They have better access to information and better equipment than you do. This still doesn’t stop people from trying... The temptation is huge: a company misses profit expectations, a crisis is reported, or a Central Bank chair gives a hint as to future intentions and people all over the world think that they can react with sufficient speed to beat the market. What usually happens is that they collectively provide the liquidity to enable the paid traders to take a profit. These are the trades that often lead to the big “blow up your account” days that I keep on about. I believe that retail traders have everything they need to compete with the big boys most of the time. It is not most of the time that hurts, however. The damage is usually done when you get involved at a time that you are at a disadvantage, such as following major news. The potential for big profits may be tempting, but remember that also brings the potential for big losses. Traders, And Therefore Markets, Overreact Believe me, when you spend your life staring at screens and are trained to react instantly to any changes in conditions, it is easy to overreact to news reports or data, significant or otherwise. The little things take on an exaggerated importance. I have heard many times, “Wow, that PMI number was huge!” or something similar. I personally witnessed Sterling drop on the news of the Queen Mother’s death. Looking back, it is hard to see what possible impact the death of a 101 year old woman could have had on the currency, but I admit to being one of the sellers. When a hint that something truly fundamental will change comes along, therefore, it is easy to exaggerate what the price adjustment should be. Add to that that paid traders are as fearful of missing a move and as prone to panic as anyone, and you can see why I state that markets often overreact. Corrections and retracements happen in all markets and for all sorts of reasons. Those following a large, fast, news driven move are good opportunities to trade. You can let the trend back up (or down) develop somewhat before committing, as the size of the initial move makes the profit available on a correction worthwhile, even if you don’t find the exact bottom. You can then set parameters to the trade (stops and price targets) that give you a decent risk/reward ratio. If you believe that over the long term the trend will continue, you can use the snap back following an initial overreaction to place an entry trade, with the advantage of having time to assess the risk/reward you are looking for and place stops and limit orders accordingly. Both of these things became apparent from my time in the currency markets, but, as I said, can be applied to any financial instrument that moves. Somewhere there are people trying to react to every hint of news. You can’t beat them for speed, but often you can use their natural tendencies against them.
Posted on: Thu, 20 Jun 2013 01:24:24 +0000
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