Navigating Counter-Trend Trading Opportunities
When making the decision to trade in line with med-term or fundamental bias, or trade against the bias in line with the shorter-term sentiment, there are a number of factors to consider…
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There is a couple of things that you can think about when making this decision. I think the best way to explain this is by looking at a recent example of the AUDUSD where we have had to make that choice.
Now, taking a look at the pair, there was a couple of catalysts that had pushed the currency pair higher in line with the fundamental bias for the AUDUSD pair, such as the RBA which came in exactly as expected with their easing measures and failing to out-dove market expectations, there was also some initial chop with the US elections but ended up being very positive for risk assets which pushed the AUD higher while the Dollar went lower across the board, and then on the 9th of November we had the positive Pfizer vaccine news. So, the upside bias was intact, and we were simply looking for a basic pullback into prior resistance to engage to the upside or buying back in line with the fundamental bias.
Now on the 11th and 12th we saw some risk off sentiment coming into the market which could have provide an opportunity to short the AUDUSD because even though the fundamental bias was still higher, we were expecting a bit of a pullback and waiting for one to get back in on the long side, so how do you decide in that situation whether to wait for a pullback and buy in line with the fundamental bias or to take the short because we are expecting one and trade in line with the short-term risk-off sentiment.
So, there is two things that you can look at in that situation, namely conviction, and timing. Let’s look at each of them individually, starting with timing. The timing of the trade is very important from both time horizons, and it comes down to the balance of probabilities. Is there a higher probability of the market moving higher or lower from that level based on the timing? For example, in the case of the AUDUSD we didn’t really have timing on our side, because at the same time when we were testing key resistance in the AUDUSD pair, we were also testing key resistance in a couple of equity futures and testing key support in the Dollar and the VIX, which meant that after the solid run to the upside, taking a look across asset classes, the timing favoured a move lower before resuming the trend higher. So, the timing wasn’t right for a buy in line with the fundamental bias, but it was the right timing for a short, given the same reasons, a higher probability of a short. So, with the timing is where your technicals comes into play quite a lot, along with things like overall market conditions, are there incoming news events, what is cross asset classes volatility and price movements doing at that time, all factors to consider.
Then, the second part that you need to consider is the conviction. The conviction you have comes down to the reasons that the market has for moving at that time, what catalyst has caused the short-term sentiment to move against the fundamental bias, was it a very significant driver or just a minor hurdle or bump in the road? This step is important because it will allow you to establish whether the short-term reasons to trade the asset against it’s current fundamental bias is worth it from a risk management point of view. So, just because your timing might be right for a move lower, and it then moves lower just as you expect, doesn’t mean the move against the bias is a good return on your risk, and that is where your conviction comes in.
Now, with conviction here I’m not only talking about how you feel about the trade. Our feelings about the trade shouldn’t have anything to do with it. It’s more about how convinced we are that the reason the market have for moving lower is good enough to take a chance at trading against the trend.
So, in the example of the AUDUSD, even though timing for a move lower was in our favour, we didn’t have the conviction or reasons for short-term downside providing enough reason to short it from resistance, even though we were waiting for it to move lower, the minor risk off tones that we had in the market at that time just wasn’t a good enough reason to trade the AUDUSD lower against the overall trend, so when both of those don’t line up it’s best then to wait for the market to ebb and flow into better levels to trade in line with overall bias.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
There is a couple of things that you can think about when making this decision. I think the best way to explain this is by looking at a recent example of the AUDUSD where we have had to make that choice.
Now, taking a look at the pair, there was a couple of catalysts that had pushed the currency pair higher in line with the fundamental bias for the AUDUSD pair, such as the RBA which came in exactly as expected with their easing measures and failing to out-dove market expectations, there was also some initial chop with the US elections but ended up being very positive for risk assets which pushed the AUD higher while the Dollar went lower across the board, and then on the 9th of November we had the positive Pfizer vaccine news. So, the upside bias was intact, and we were simply looking for a basic pullback into prior resistance to engage to the upside or buying back in line with the fundamental bias.
Now on the 11th and 12th we saw some risk off sentiment coming into the market which could have provide an opportunity to short the AUDUSD because even though the fundamental bias was still higher, we were expecting a bit of a pullback and waiting for one to get back in on the long side, so how do you decide in that situation whether to wait for a pullback and buy in line with the fundamental bias or to take the short because we are expecting one and trade in line with the short-term risk-off sentiment.
So, there is two things that you can look at in that situation, namely conviction, and timing. Let’s look at each of them individually, starting with timing. The timing of the trade is very important from both time horizons, and it comes down to the balance of probabilities. Is there a higher probability of the market moving higher or lower from that level based on the timing? For example, in the case of the AUDUSD we didn’t really have timing on our side, because at the same time when we were testing key resistance in the AUDUSD pair, we were also testing key resistance in a couple of equity futures and testing key support in the Dollar and the VIX, which meant that after the solid run to the upside, taking a look across asset classes, the timing favoured a move lower before resuming the trend higher. So, the timing wasn’t right for a buy in line with the fundamental bias, but it was the right timing for a short, given the same reasons, a higher probability of a short. So, with the timing is where your technicals comes into play quite a lot, along with things like overall market conditions, are there incoming news events, what is cross asset classes volatility and price movements doing at that time, all factors to consider.
Then, the second part that you need to consider is the conviction. The conviction you have comes down to the reasons that the market has for moving at that time, what catalyst has caused the short-term sentiment to move against the fundamental bias, was it a very significant driver or just a minor hurdle or bump in the road? This step is important because it will allow you to establish whether the short-term reasons to trade the asset against it’s current fundamental bias is worth it from a risk management point of view. So, just because your timing might be right for a move lower, and it then moves lower just as you expect, doesn’t mean the move against the bias is a good return on your risk, and that is where your conviction comes in.
Now, with conviction here I’m not only talking about how you feel about the trade. Our feelings about the trade shouldn’t have anything to do with it. It’s more about how convinced we are that the reason the market have for moving lower is good enough to take a chance at trading against the trend.
So, in the example of the AUDUSD, even though timing for a move lower was in our favour, we didn’t have the conviction or reasons for short-term downside providing enough reason to short it from resistance, even though we were waiting for it to move lower, the minor risk off tones that we had in the market at that time just wasn’t a good enough reason to trade the AUDUSD lower against the overall trend, so when both of those don’t line up it’s best then to wait for the market to ebb and flow into better levels to trade in line with overall bias.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
