Markets are driven by mass psychology. Anything that brings uncertainty in our lives we hate it. Markets are just a reflection of mass psychology. Markets hate headline breaking news. When there is a breaking news headline, markets become nervous and react to it. Markets are always unpredictable. Markets are basically driven by the crowd sentiment which is hard to predict at times. Perceptions count a lot when it comes to market behavior. Did you read the post on how Reserve Bank of New Zealand miscalculated market reaction and was shocked. So just like us retail traders even a central bank can get surprised by the market.
The recent example. US Presidential Elections. Hillary Clinton is being re-investigated by FBI on her emails close to US Presidential Elections. Nothing to worry as a currency trader. What this investigation has to do with US Dollar strength. But then over the weekend on Sunday FBI clears Hillary Clinton of any wrongdoing and a statement is issued no charges will be bought against her. This breaking news makes headlines all over the world. Take a look at the following USDJPY H4 chart.
Breaking news over the weekend is always lethal. It works. This statement was issued by FBI on Sunday and became a breaking news on that day. On Monday USDJPY, EURUSD, GBPUSD and other pairs opened with a gap which is known as the Weekend Gap. Was this weekend gap a surprise? No not at all. If you take a look at the above USDJPY chart, do you observe that there is already a buy signal on the chart. It was formed on Wednesday. On Friday, there was NFP Report release. Price goes up. You can check the last 2 H4 candles on 4th November.Read how we made 1000 pips in 7 days with USDCHF naked trade.
So USDJPY is already in an uptrend. Nobody knows there will be breaking news on Sunday. The breaking news just confirms the uptrend and market opens with a 100 point gap on Monday. This type of gap is known as a Runaway gap and it always occurs in the direction of the trend. There are some gaps that are meaningful and there are some gaps that are meaningless and can be simply ignored. Did you read the post on how to predict price on short time frames like M1, M5, M15 and M30 using Autoregression.
What Is A Gap?
Technically a gap occurs when price jumps either up or down skipping price between two points and as a result leaves a hole on the price chart. In the stock market gaps are more frequent. A share price jumps when the company releases earnings report or announces a new product or gets sued. Often this price jump takes place in the shape of a gap.
Recent example is that of Facebook. Facebook share prices dropped 9% in after hour trading when the company released the report that its ad revenue will plummet in the coming year. Now this price decline took place during after hour trading as markets are now open almost round the clock. In currency market also there are some brokers like Oanda that allow you to trade during the weekend. So when the news got released that FBI has cleared Hillary Clinton of any charges over her emails, the news got traded and was already priced in at a higher price when regular market opened on Monday. Watch Million Dollar Trader Program Caribbean Documentary.
But sometimes big gaps appear. It happened a few years back just after the Scottish Independence vote. Everyone was expecting a yes vote. Polls showed a close win for the yes vote. GBPUSD was going down when suddenly it jumped up 300 points when it was announced that Scottish Independence vote has failed. The market was surprised and gapped up 300 points.
The other gaps are the breakaway gap and the exhaustion gap. An Exhaustion Gap appears at the end of the trend. So when you think that this is a runaway gap also known as a measuring gap, trade in the direction of the trend. When you think that it is a breakout gap or an exhaustion gap trade in the direction of the new trend. Candlesticks are important signals. Whatever happens it doesn’t happen all of a sudden. There will always be a warning signal by the candlestick patterns and you should learn and master how to read these signals before you get burned by the market. Watch Trading and Portfolio Management Institute South Africa Documentary.
As said above in the currency market most of the time the gap occurs over the weekend when the market is closed. One solution is to close the trade on Friday before the market closes and reopen it on Monday when the market opens after taking a deep look at the charts and determining the correct direction of the trade under the new conditions.
How Magazine Cover Stories Can Act As A Contrarian Indicator?
As said above, markets are driven by mass psychology. Why? Because markets are just people buying and selling in a crowd. Mass psychology can have two extremes. Either it is bullish or it is bearish. Bullish means everyone is optimistic and is willing to keep buying. This drives the price higher. On the other end, when people are pessimistic and want to only sell. This makes the market bearish and price starts to fall. It has been studied that whenever major magazines report that the stock market is strongly bullish, it means the market is near its top. Similarly when major magazines featured a bearish market, it was a signal for the start of an uptrend. So magazine cover stories are always contrarian signals that you should take seriously.
In 1979 Business Week carried the cover story with the headline, “Death of Equities.” In the cover story it was reported that people were running away from the stock market. Just after this cover story was published, the bull market of 1980s and 1990s started. Similarly in 1978, Time Magazine carried a cover story with the headline: “Rescue the Dollar. ” Dollar was in shambles with inflation rampant in late 1970s. Just after this cover story was published Dollar rally started.
In the same manner, Economist magazine also had cover stories that have signaled start of a new trend. In 1985, Economist magazine reported that British Pound is a petro-currency and since oil prices were going down this was the main cause of GBPUSD plummeting heavily. Just after this cover story was published, GBPUSD found the bottom and a great multi decade rally started.
In 2000, Economist Magazine had the cover story,”Euro Shambles”. Euro was a new currency then and the cover story reported that the new currency has failed miserably and the new currency will hurt Europe economically. Within a few weeks, EURUSD found the bottom and in the next few years appreciated 5,000 points.
In 2004, Economist did it once again with a cover story in February issue titled: “Let the Dollar Drop.”This cover story again happened just before USD rallied. In 2002, Economist had a story,” The Sadness of Japan.” In this cover story, Economist magazine argued that USDJPY will go down more. After the cover story got published, USDJPY rallied big time. In 2007 once again, Economist had the story,”The panic about dollar.” EURUSD went down heavily after this cover story. So you can always take the cover stories that appear in financial magazines as a contrarian indicator. Economist magazine has a got great track record of acting as a good contrarian indicator.