By: Kevin Sollitt
Yesterday’s Asian open although almost a distant memory for most FX punters may be worth a secondary review, not least because the price action demonstrates how volatile FX can be at any given time but also serves to remind us of the importance of retaining discipline in our trading no matter what the reason or excuse behind validation of seemingly inexplicable gyrations.
Yesterday’s initial ‘risk-aversion’ theme was apparently put down to a ZAR/JPY cross-trade going through with a couple zeros too many added to the size of the order.
The consequent effects of JPY, AUD and NZD crosses dropping by a full percent on the open proves the theory that although markets are not always efficient, at least in FX there is always a chance to do business at a given price. Even at this illiquid time of day players were able to get orders filled, regrettably for many of us at disadvantageous levels.
The point is that although many people new to the FX game are dismissive of stop-loss tactics due to the sometimes-erratic nature of price action exampled very clearly yesterday, the benefits of sticking to a disciplined strategy are still visible. If the move turns out to be false, chances are a trade can be re-established as the false break reveals itself. Imagine the opposite scenario of not having a stop in place, undergoing such a move and being left exposed with mounting losses and armed only with hope and curiosity for defence.
Secondly, moves like this although often reversed, as was the case today, can provide important psychological insights as to market positioning. For example, if the market truly believed that the US was exiting recession and the risk trade was entitled to be re-established, would there really have been such a virtual bloodbath in these pro-risk crosses yesterday? Unlikely. That said, the only liquidation taking place yesterday was probably stoploss driven and those among our community that trade purely from a technical perspective may feel slightly hard done by that the breaks seemingly occurring have proved to be false, at least for now.
This sets the stage for a very interesting reaction to this week’s FOMC outcome and Non-farm Payroll report. A change in Fed language alluding to QE ending will certainly see the risk appetite return. Anything worse than a -175k fall in payrolls will probably be met with calls for the sky to fall and the double-dip recession theory returning.
It’s going to be an interesting week. Trading tactics for such conditions we suggest are best served by a reactionary stance in favour of a proactive stance. This market feels ready to break out and the signals right now are mixed.
Bottom-line, always leave an order to protect positions, whether they be at a profit or a loss, or both. Good trading.