It's a truism in trading that your strategies are worthless unless they pass the test of the market. They either make money in the long run, or they don't. We have a hard, factual standard we can hold matters to.
When it comes to theories about what is happening in the market
, it's much harder to apply similar standards because many things don't appear on the charts. However, this often means we fail to even try.
This is bad practice. We should be willing to challenge our own, and other's theories about the market, as well as investigate out-of-the-box theories, by comparing them to available chart evidence. Edit: squitstoomuch has drawn my attention to the fact that my analysis and understanding of the situation has some serious, if not fatal flaws. Rather than delete the post, I'll leave it up because looking at other people's mistakes is often useful, and it's still a good idea to compare your ideas to the charts and see if the market validates them. Grossly incorrect stuff has strike throughs, the rest still stands.
For example, a very common analysis you will hear after the combination of rate decision and Governor press conference is that the overall direction of movement can be accounted for by what was said in the conference. This is something you can assess by looking at the charts. Proposition 1: The USD fell largely due to Yellen's comments implying future rate trajectories
M1 EURUSD http://i.imgur.com/MS7ceQf.png
M1 USDJPY http://i.imgur.com/JeHI8qw.png
You can see that the majority of the price movement against the USD happens within the first ten minutes after the rate release, and within that, the majority of the move happened within the first minute.
Logic dictates that NONE of this movement was related to the content of the speech, simply because the speech had not been given yet.
You can also see that although there was movement throughout the speech, it managed to only depress the USD an additional third compared to the rate release.
How you choose to interpret this is up to you, but at least you can now frame the 'it was Yellen's speech that did it' theories in the context of some irrefutable evidence. My personal interpretation is that whilst the speech content strongly influences price, and did further depress the USD, it was not the original motivator for the drop. Nor was it the main determinant of the magnitude of the drop in the value of the USD, because both of those happened before she ever opened her mouth.
Let's look at some more propositions. Proposition 2: You should trade what happened last time
USDJPY H1 chart from 14th December 2016, the previous time rates were raised. FOMC raises Fed Fund Rate, USD goes: http://i.imgur.com/qL7upT7.png
... up. So if you had simply looked at what happened last time, and then bought this time, you would have lost money. I'm going to strongly recommend that nobody short the USD for the next rate hike just because
it went down this time! Proposition 3: You could have just predicted the movement on technicals.
... as it turns out, one of the most basic, elementary technical strategies (trendline + horizontal resistance) would have gotten you in nicely this time, at least on USDJPY. The EURUSD set-up was a bit more advanced, but still straightforward in the context of the essentially guaranteed rate decision. http://i.imgur.com/L8B7s1K.png
Interestingly, pivot points perfectly predicted the extent of the day's price movement this time round.
USDJPY (D) http://i.imgur.com/emY42Nn.png
EURUSD (H1) http://i.imgur.com/fD8UDss.png
(Note the different timeframes. This may just be a case of coincidence, but I will say that ever since I put them on my charts, they've been very useful for exactly this sort of thing: how far the market will go before a pause or a retrace). Proposition 4: the market is irrational and unpredictable
I don't have any strong evidence to disprove this, but I will say that the NFP price action was a big red flag that something like this was going to happen on FOMC day, and that there are clear, strongly repeatable analytical approaches
that predicted an outcome like this. Many people were not the least bit surprised. .
Finally, I'd like to suggest that this is much more than just "pricing in". I don't have the time nor patience to go through my archives and dig out every "priced in" economic release that I've ever tried to trade, so I'll leave the evidence hunt for those more curious.
But in my experience, when the market has priced an event in, and that event happens, the usual result is ... nothing. This is what 'pricing in' means, that price is already correct in regards to that information.
If anything actually happens, it's usually counter-intuitive, and that means that the big banks are using the event to hustle price about.
As a footnote, that's not the only way they hustle price. One thing they also like to use talking heads to influence market sentiment: http://news.forexlive.com/!/goldman-sachs-see-a-second-fed-hike-in-june-20170310
(This bulletin is saying there will be faster rate hikes, ie investors should buy USD. You might wonder why Goldman would risk their reputation by putting their name behind directions they're not trading, and the easy answer is that nobody remembers these bulletins, but everyone remembers the end of year profits of the bank. Bank mouthpieces aren't there to help the clients, they're there to help the bank)
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