Follow the Market

How to Follow the Market’s Rhythm

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Follow the Market

“If most traders would learn to sit on their hands 50 percent of the time, they would make a lot more money.” – Bill Lipschutz, Market Wizard

Most traders overtrade, for one reason or another. Overtrading is perhaps one of the quickest ways to decimate your account and especially as a retail trader with limited risk capital, the best thing is to only trade when the market is active and offering A+ trades. Efficiency is possible by working smarter, not harder.

The question becomes: how can you identify those instances when it’s worth pulling up a chair? When will the market be ripe for participation and when is it better to sit on your hands?

The Market’s Rhythm

Some weeks the market is very active, and some weeks (like this week in particular) the market is simply chopping around. There is a rhythm to the market, which is important to understand. All traders probably know by now the usual behavioural traits of the three main money centers in Foreign Exchange:

  • London is usually the trend-setter;
  • New York is the deepest liquidity pool and frequently challenges the London move;
  • Asia is usually the consolidation session.

But sometimes the market is awake and sometimes it seems like it’s sleeping. How can you logically forecast when to sit in front of your screens and when to something else with your time?

Let’s take this week as an example. This week we’ve had 3 relatively big pieces of data thus far:

  • UK employment data
  • UK CPI
  • US CPI

You would think that the markets would be pushed around by such items (which usually generate viable NewsFlow Trades) but instead all has gone silent this week. The markets are evidently waiting for something. Bill Lipschutz, founder of Hathersage Capital and Market Wizard, put it this way:

“What is important is to assess what the market is focusing on at the given moment”.

Follow the Market

Source: ScotiaFX

Follow the Market

Source: Commonwealth Bank of Australia

By paying attention to any bank sheet or market wrap, it becomes immediately evident what the drivers are for the day or week ahead. This goes one step further than just watching an economic calendar because amongst all the pieces of data, you know which ones will be the main binary options platform focal points.

In particular, this week the FOMC rates decision and the ECB rates decision take center stage. The markets frequently remain rangebound ahead of such influential decisions and for good reason: if something unexpected comes out of either meeting, it could potentially force a decisive shuffling of positions – meaning large moves. This would make any pre-event risk taking fruitless.

Mindful Inactivity

The key to remaining in touch with the market’s rhythm resides in a few important practices:

  • check your macro calendar at the beginning of each day (as a reminder);
  • read up on a few bank sheets over the weekend in order to get a feeling for what will be in focus during the week ahead;
  • read session wraps in order to stay in touch with the day-to-day happenings (ForexLive produces free market wraps here);
  • take into consideration bank holidays, regular holiday times (August/December).

Mindful inactivity means that you’re acting like an eagle and not like a pigeon. Eagles do not waste energy. They wait for thermal columns and glide seamlessly upwards, carried by the hot rising wind. Thermals appear during morning or early afternoon hours after the sun rises and warms the earth. When a surface grows hot enough, a thermal column rises into the atmosphere. So that’s when it’s more likely to see eagles flying. They don’t appear out of thin air…you know that they are creatures of habit and are attracted by a certain dynamic.

Mindful traders are tuned into the rhythm of the market and listen, read and prepare. If a trend is starting on the back of a meaningful story/development/news item, a significant price change may follow. Hence, waiting for the market to be inspired by something enhances the risk-reward ratio of your trades, and can also positively impact your win rate.

Mindful Trading in the 21st Century

Understanding the matters that matter and sitting on hands the rest of the time has become much more difficult nowadays. With social media (Twitter especially), social trading platforms and tons of analysis being spewed out each day, the noise-to-signal ratio is blasted out of proportion.

We need to apply the 80/20 principle: 20% of the efforts will return 80% of the benefits. Don’t get too close to the market. Only focus on market wraps, important news events and read up on the rest during the weekend. Do not get carried away with analysis whilst in a trade – let your trade management do it’s job.

Over to You

Remaining in touch with the market’s rhythm will give you peace of mind when sitting on your hands. You won’t be lured into action. You won’t be looking for trades. You will let things come to you. But this is nothing new: profitable trading habits were born centuries ago and endure to this day. Jesse Livermore had already written:

  • “Analyze in your own mind the effect, marketwise, that a certain piece of news may have”;
  • “Try to anticipate the psychological effect of this particular item on the market”;
  • “Don’t back your judgement until the action of the market itself confirms your opinion”.

And I would simply add:

  • when things aren’t clear, or when your edge isn’t present, sit on your hands. 

It’s ok to let some trades slip past you, so because the ones you do take will have a much higher probability of working out.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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