Ask Yourself ‘What’s Next?’

You may be thinking, ‘what has this blog post title got to do with trading?’.  Well, if you do some research you will find that the greatest volume of trades in the Forex markets are actually SPECULATIVE.

If so, then perhaps you need to think like a speculator.  Speculators are always on the look out for the next big idea, trend or thing and want to get in early in order to maximise their returns.

When trading, it may help to ask yourself the question ‘What’s Next’ in relation to a currency pair or other financial instrument.  For example, if we take the GBPUSD currency pair and ask that question, there are several things which may come to mind at the time of writing this post:

  • Potential tightening by the Bank of England may see Interest Rates Rise this year and maybe in August.
  • Continued pressure from apparent lack of progress in the Brexit negotiations and the seemingly consequential slow down in UK growth and business investment.
  • Rising or falling UK Inflation and Wage Growth.
  • USD strength or weakness with Trumps Trade Wars, North Korea talks progress or other issues Trump may raise. US Growth and Inflation and potential further Federal Reserve Interest Rate Rises etc.

So considering the above, unless the Brexit team pull a rabbit out of the hat or the Bank of England hikes by more than expected or Trump destroys the US economy (unlikely)  then maybe further overall weakness in the GBP against the USD.

(Post publishing note on 3 July 2018: Things can change quickly in the Forex world – currently we are now Bullish GBPUSD on a retracement move up, our initial target is the Daily 200sma and our stretch target is the Weekly 200sma and then we will look for short opportunities – this view is based upon Technical Analysis and that recent forecasts suggest better than expected UK growth but this view could change with events such as FOMC, NFP, BOE and Brexit talks oucomes etc.).

You may have read or heard the old trading adage ‘Buy the rumour and sell the fact’.  Similarly you could also say ‘Sell the rumour and Buy the fact’.  Time and time again these phenomena occur in the financial markets.  Why?  Because speculators are taking positions long before an actual event such as a Central Bank Interest Rate rise, based on earlier hints that this may happen.  If the speculated economic news event does occur, as expected, and does not deviate much from that expectation, then profits will be realised by the speculators on the event occurrence.

So how can you apply this thought process to your trading?

If you can seen an obvious trend then ask yourself what is driving it and if that still has validity, then wait for a pull back to join the trend.

If you can see a currency pair potentially topping or bottoming find out why and then if a turn may be valid have a look at the price action for rejection candles, Lower Highs and Lower Lows, or if basing then Higher Highs and Higher Lows, maybe divergence and even a Head and Shoulders.  If it starts to trend then take advantage of pullbacks.

If something is Range Bound then ask yourself why?  It probably means market uncertainty. In these cases it can be prudent to wait to see if a common pattern emerges such as a Triangle, with a subsequent break, out which may be trade-able on a pull back / re-test.

Technical analysis can therefore go hand in hand with fundamental analysis.  If trading higher time frame charts such as the Daily and Weekly then one may say that all the news of the day is thus priced in when a candle closes and therefore why follow the news or economic events?  I would say that if you can identify why a currency pair is moving – what is behind the speculation – then that can help your trading.  After all a currency pair is made up of two individual currencies which reflect the respective economic picture of their respective countries.  If the related economies appear to be diverging then a trend will occur.  That said I am a great fan of Price Action!

When you look at your charts and do your analysis ask yourself:

  • What Has Price Done? (and Why?)
  • What Is It Doing Now? (and Why?)
  • ‘What Could It Do Next? (and Why?)
  • and ‘Do I Want To Get Involved? and Why?’
  • essentially ‘What’s Next?’

If you need some pointers on where to look to find out what the speculators may be thinking then have a look at some of the websites on our Useful Resources page.

Top Trading Tip:  When looking at your charts ask yourself the ‘What, the Why and What’s Next?’