Market Doesn't Make Sense?

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Aug 21, 2014
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Intraday trading is a kind of short term trading as positions are opened and closed within the daily trading session.
Most participants in the Dukascopy trading contest fill in this category of trading and rely on the 4h chart and below time frames to find opportunities in the market. They can't hold on their positions for an entire month due to the limited time of the contest which is a month period.
Intraday trading is considered to be the most rewarding kind of trading but in the same time the most risky and frustrating.
Trying to find short term opportunities is far from easy as the trader has to deal with the intraday market volatility and noise which sometimes don't make much sense. They also have to place tight stop losses as they don't plan to stick for long in the same position and so they are usually stopped out more frequently than medium and long term traders.
This article helps you understanding market moves and make sense of them.

2-How traders approach the market?

The main market approaches that traders usually undertake are technicals and fundamentals in order to make sense and justify market moves.
Technical traders rely on chart indicators or candlestick patterns to decide whether it is appropriate to enter the market. However, they could find themselves frustrated in many occasions due to price not respecting their levels. As an example, they perceived a strong support that held market previously plus it is situated at a confluence zone such as a Fibonacci level and a moving average. Despite that market price broke that level and stopped them out leaving them frustrated with many what, how and why questions.
As for the fundamental traders, they rely heavily on the news to anticipate market direction. They are often correct in their predictions but their entry timing in the market is often early. In many occasions prices go opposite to their position causing draw-downs in their accounts and perhaps stop them out before start heading in the correct direction.
The reality could be there is a third element often neglected by market participants.

3- The trading element often neglected by intraday traders

I am sure that most of you especially those who participate on the fundamental analysis contest experienced in many occasions the release of a news that should be positive for a currency or a pair to only find that market reaction to it came muted or worse prices took the opposite direction.
To trade short term it is wise to check the current market sentiment before taking position in the market. You could find a good technical or fundamental opportunity on a pair but the market sentiment is against you.
The best trades are usually the ones where technicals, fundamentals and sentiment are aligned. When you spot one of those you will find they represent the best risk to reward ratio. This is also when big institutions step in the market and we all know the best way of trading is to follow the big boys as they are the only ones capable of moving the market.
Luckily for us retail traders we can find every info on the net whether technical, fundamental or sentiment related piece of news. The hard work is usually done by professional market analysts and thus the only thing left to do is to check market condition and confirm the three components are aligned.
Let's see an example and how to apply what described above.

4- Trade examples

a) First example:

USDJPY 4h chart

This example shows ideal market conditions to take a trade.
USDJPY presented a good trading opportunity on Tuesday March 28th after the New York open. The question is how could we spot that trade? Let's see if the three elements are aligned.
Fundamental: We know that the Fed is in hiking cycle and there are still two hikes anticipated this year. The BOJ is in easy cycle. Bullish for the USDJPY.
Sentiment: The sessions preceding Tuesday saw a USDJPY sell off as TRUMP administrations failed to repeal the OBAMA health care. Investors started to question about the Trump administration ability to push through growth-boosting initiatives such as tax reform and infrastructure spending. However during Tuesday Asia and Europe trading sessions sentiment started improving across the markets after the Dow Jones Industrial Average losing streak.
Technical: Prices pulled back to test Monday March 27th low which is also this year printed low.
With the fundamentals, technicals and sentiment aligned we should be pretty confident to take a long short term position with a tight stop below Monday low and take our profit with the close of the session providing a remarkable risk to reward ratio. Does it make sense for the market to take out the Monday low? of course not.. Pull the trigger.
With practice, patience and dedication you will start to spot more and more of these trading opportunities on any currency pair applying the same principles above.
Ok let's move on to a second example.

b) Second example:

EURUSD daily chart

This example shows how neglecting one element can be detriment to your trading.
During the previous week EURUSD broke out of well visible head and should pattern on the daily chart. This is a great technical set up to enter a long position. Market sentiment had been deteriorating at that time too with investors questioning the strength of Trump administration and the so called Trump trade. The fact is intraday traders who started looking to enter long positions were set up for a south brutal ride. The reality is fundamentals don't follow the logic behind this trade. We know that the Fed is in a hiking cycle while the ECB in easing cycle. Two divergent monetary policies favoring EURUSD shorts in the long term. The break of this strong technical pattern on the daily chart requires a change in the described fundamentals which isn't there and now the three elements to our trading are not aligned. What happens is that big institutions triggered stops before reversing punishing those who neglected the big fundamental picture for this pair.
However, Wednesday 29th makes good sense to make a short call with sentiment improved across global market and market returned to test the neckline providing a perfect technical level to enter at.

I hope this article provided you a new way to approach the Forex market and will improve your intraday trading.
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Mar 12, 2020
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Everything makes sense if you understand how it works and can qualitatively analyze events. That's why you need to gather as much information as possible and deal with all the details and nuances before you can say anything or criticize it. And only after that do you draw the final conclusions.
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