One of the ongoing questions facing traders is whether the spot value of a currency pair sufficiently prices in information. Technical traders base their strategies and tactics on the premise that the price and its patterns are all you need to know to shape winning trading strategies. Fundamental traders reject this construction and argue that a chart is only one layer of many. Prices, in the fundamental school of thought are viewed as a signature of expectations and emotions. That is why surprise moves the markets. Price patterns become psychological signatures and shift when the balance of expectations shifts.
In currency trading the emotion is mainly about expectations regarding growth, inflation and monetary policy. More often than not, market expectations in currencies have longer-term horizons to allow for economic and monetary policy to take effect. However, live markets are constantly seeking new information that may cause an adjustment in expectations. As a result, the price action becomes fundamentally psychological. This brings us to the emergence of a new force affecting the behavior of markets -- the Trump tantrum.
When President Trump speaks or tweets, markets react. Surges and spikes result. It is analogous to rocks thrown in a lake causing ripples, or in some cases waves. It is similar to an acid poured into a base. There will be a reaction. There will be a diffusion. The challenge ahead will be how to trade the coming Trump market tantrums. Let’s take a closer look and see what trading tactics make sense in trading Trump.
Market reaction after Trump’s first news conference on Jan.11 shows the dynamics of how prices react to Trump talking (see “Sound bite trading”). On a one-minute U.S. dollar/Japanese yen (USD/JPY) currency pair chart we see an initial reaction and then a counter retracement of that spike. This was followed by a retest of the initial level of support and then a breakdown of support.
We can ask: Is market reaction to Trump just noise, or can this be traded with any logic? Perhaps a bit of fundamental thinking will help out. A foundation of fundamental trading is that a price forms and stays in a pattern until news moves it out of its pattern. The patterns formed during the news conference reflected news as markets tried to absorb what Trump was saying. Here, basic support and resistance lines generated the boundaries between old and new information. When the price-formed support was tested, we saw a clear sideways pattern. A break of resistance of that pattern at the 38.2% Fibonacci point was a signal to buy. When the price probed and penetrated initial support, 11:20:11:40 CST, a sell signal occurred. Both the buy and the sell signals were fundamental signals, because the patterns that had been formed were clearly a reflection of market emotions about the Trump statements. So, a first lesson to be observed in trading Trump is to focus on boundaries, patterns of resistance and support.
A second dimension of analysis of price reactions to Trump speaking is its effect on price deviation. During the Trump conference, the low-to-high range, even at the one-minute candles, can widen. This widening represents initial uncertainty. Traders can use this as a contrarian indicator that the range will narrow. This reaction happens often in markets. The reactions to Trump statements remind us of the old adage: “buy the rumor-sell the fact.”
A third lesson for forex traders is to keep a close eye on the USD/JPY and its co-movements with the S&P 500. Market patterns in both the USD/JPY and S&P 500 reflected “risk off” behavior. During the coming period of the Trump administration, the USD/JPY is perhaps the best currency pair to trade Trump as it often reflects the risk-on/risk-off battle.