It is often said that success comes to those who embrace change. Successful businessmen, for example, create new products and services that cater to the ever-changing demands of customers.
The age-old saying, “The only thing constant in life is change,” isn’t any less true in trading. Of course, adapting to change isn’t easy, but as a forex trader, your job is to be flexible. One distinguishing trait I’ve noticed among successful traders is their ability to figure out market themes by synthesizing patterns from different assets and time frames.
For instance, just because you only trade forex doesn’t mean you don’t have to keep tabs in other financial markets. We’ve learned from the Intermarket Correlations section of the School of Pipsology that currencies also share relationships with commodities, bonds, and stock indices.
Now, think of themes as theories that traders create to make sense of what’s going on in the markets. But of course, a theory can only be good if it truly captures trends in the market. If it is based merely on one’s biases, then you might as well be trading with your eyes closed.
How can we, as traders, discover market themes?
The first step is gathering data. Before you even THINK of putting a trade on, read up on what is happening in the economic landscape. There are many ways to do this such as reading major news websites or reading up on Pip Diddy’s Top Market Movers blog post at the end of each week.
Follow this up by looking at the most recently released important economic reports. Check whether they impressed or disappointed and if/how they affected market sentiment. Ask yourself questions like “How did the market react?”, “Is the market bullish?”, and “Is the market bearish?”
After investigating the fundamental background and market sentiment, you can move on to the technical aspect to find a valid forex setup that supports your biases. Look for patterns, trends, and indicator changes which hint that price may move with the market theme.
Discovering market themes is about combining all of the key data points and turning it into a workable trading framework. It’s like putting together a jigsaw puzzle from scratch: you begin with the edges and slowly build up the middle to form a complete picture.
For example, a news report from the U.S. comes out better than expected, and the stock market soars but the dollar ends up getting sold-off. This can be a sign that the market is extremely bullish and hungry for risk. Using this information, you look for a technical swing setup that enables you to sell the U.S. dollar versus high-yielding currencies, like the Australian dollar, at an appropriate price.
Some of you are probably saying that this only applies to those who prefer to trade higher time frames. However, as a scalper or day trader, knowing what the expectation is for a particular economic report could also work to your advantage.
As with most things related to becoming a better trader, learning how to properly decipher the market theme is difficult. It requires patience, time, and hard work. But the fact is, properly identifying market themes is very important in trading.
The clearer the overall market picture is, the easier it is for you to determine whether the trade is truly going in your favor or it is simply faking you out. Also, more than simply going with where the market is taking you, having a set market theme allows you to ANTICIPATE the direction to which it is headed. Now wouldn’t you want to be capable of that in this volatile market environment?