It looks like sometimes the bank/Hedge funds go against fundamentals Because I was looking at the Lita currency strength for this week. GBP(10) was stronger than JPY(-35) but the market drop like crazy.
What do you guys do when that happens? If you already in GBPJPY long do you close your trade and wait for a reversal pattern or do you keep adding to your position because you know at some point the market will shoot back up if Fundamentals still show that GBP is stronger than JPY.
Hi Steven,
This happens, because the fundamental data does not equal forex prices. I.e. if fundamentals are strong, it does not mean it will be immediately reflected in the price.
Price is what people are willing to pay for something, not the intrinsic value of it. Macro trading is the act of calculating the value of something, with the belief that price tends towards value eventually.
Because of this, it's important to set stop losses and targets based on the volatility of the pair, to give it enough time to work.
Sometimes it works instantly (my favourite kind of trade), sometimes it takes weeks, and other times it goes sideways. Very rarely have I seen a trade actually hit my stop-loss within 1m.
And this is why having a strong risk management plan in place for when it doesn't go in our favour right away is important. To give you a bit more insight, I actually longed GBPJPY recently, and the position is negative (about halfway to my stop-loss). It's one of 4 trades I have open, and in a situation like this I do the following:
Give the trade at least 4 weeks (1-month) to work, provided it doesn't hit my SL by then. This is only the case if you set your stop loss based on monthly volatility (using ATR calc)
If it doesn't start moving in my favour by the end of 4 weeks, I swap the trade out for a fresh idea on my watchlist
From using the technology, plus further relative analysis and discretion... I get just under half my trades correct and returned over 100% gain in 2020/21 tax year - so it works, just needs to be executed properly.
- Don't just enter a trade, because the technology lined up. Enter a trade because you understand what the technology is telling you about the two economies behind the asset, supplementing your additional research.
Hope this helps!