What a time it has been of late in the Global Economy. Is there a day that goes by when there has not been a mention in the worldwide press about the Greece fiasco and whether or not they will or won’t leave the Eurozone conundrum? The endless talks and debates along with the eventual referendum being held has created a mixed bag of emotions and feelings amongst currency traders across the world. For some, there has been a relish for the possible volatility caused by such news, while others are being cautious and staying away from the markets as much as possible. Whatever side of the fence you sit upon, for a trader with solid rules and a secret plan it really has been trading as usual which, for some, is hard to believe.
You see, you can sit glued to the TV or Internet waiting for any snippet of news, or stare fixated at the price charts instead if that’s what you would rather do; but either way these are not the healthiest of practices. In my humble opinion, we have to except that no matter the amount of news we read or study of charts we engage in, none of us will ever truly know what is going to happen next, so in the long run, relying upon anything but price to tell us what to do often becomes folly. No matter how you decide to interpret the news you read about any given financial situation, when you take action you are placing your trade on your perception of the events and not the reality of price itself, and these are two very different things indeed.
Let’s use the Greek referendum as a case example. On Sunday 5th of July, the population of Greece decided upon the “No” vote for acceptance of their bailout terms. Before the actual vote took place, many market analysts suggested that if there was a rejection of the bailout terms by the Grecian public then there would be a negative impact on their future within the European Union, with Greece likely to be eventually forced to leave the EU. So what impact therefore would we expect this to have on, say the EURUSD currency pair on that Sunday market opening then? It would have been assumed that there would have been a severe drop in the price of the EURUSD, forcing traders to sell the pair at the open. The pair did in fact gap down on the open as we can see here:
The EURUSD ended up opening almost 150 pips lower that Sunday, clearly reflecting the negative sentiment towards the outcome of the Greek referendum. However, almost immediately after the gap happened, the market then decided to do this:
Prices only ended up falling about another 20 to 30 pips lower, followed by a rally throughout the rest of the trading session. Ask yourself a question now: how would you have felt if you had been shorting the EURUSD, only to see prices reverse on you pretty much the minute you entered the trade? You would have probably felt confused and frustrated I would guess.
Now, in some instances we do see gaps like this happen and then carry on for some time and I do have rules in my trading plan for when I follow these gaps, but the rule that comes before this tells me not to go with a gap like this if the gap opens into an institutional level of supply or demand. I don’t want to be the novice selling to the banks and funds after the price has already fallen, especially if it means I would be selling into a level where the chart has already shown me that there were more willing buyers than sellers there before. It is this imbalance that created the level in the first place, so instead I would want to be buying from the novice seller, giving me a very low risk and high potential reward trade instead. That gap was just such a time when we would want to be buying, as we can see from where the prices rallied in the below chart:
See how prices rose sharply from the demand level where prices originally gapped into? Sure you may be saying to yourself that the pair shouldn’t have risen because the fundamentals said otherwise; but let me ask you this: how any times do you find price having the opposite reaction to the news? Probably more often than not. That’s because in reality the fundamentals always put us into the game a bit too late. In fact, the EURUSD did end up falling again but only after hitting an opposing level of supply first:
I know that these concepts and lessons are pretty much contrary to everything you may have read or heard before, but I do stress to all my students at Online Trading Academy that they must learn to think differently from the rest if they are to ever hope to achieve consistent profits in the financial markets. Doing what everyone else does typically only gives us what everyone else gets. That’s always a great point to remember in all walks of life. If that doesn’t resonate with you then maybe think about this. The only reason why markets truly exist is to give people the opportunity to make money; and the best money will always be made when you buy at the lows and sell at the highs. I hope this was useful to you.
Be well and take care,