<p>Imagine this
scenario: You sit down to check the markets. You review recent price movements
and consider <a href=”https://www.financemagnates.com/thought-leadership/4-top-strategies-popular-with-forex-traders/” target=”_blank” rel=”follow”>potential trade ideas</a>. What happens next?</p><ul>
<li>You may quickly stumble upon
what seems like a great trade idea but feel uncertain because it appears
to be too good to be true.</li>
<li>You spend 30-60 mins delving
deeper into the markets only to find yourself trying to figure out what to
do next.</li>
<li>Or you’re putting in a lot
of effort and mental sweat to craft a high-odds trade, but it’s not working
out.</li>
</ul><p>Does this sound
familiar? </p><p>In this type of
scenario or at this point, there is the temptation to skimp on crafting a
trading catalyst and game plan but rather jump straight into a pattern or
similar route. Right? But, when you do this, you end up inadvertently killing
the golden goose. How? Let me explain:</p><p>As a trader, you
enter into a trade to benefit from price movements. However, without an
underlying catalyst, there’s no reason for a market to move or ‘react’ as is
often the case in response to an economic release. A trading catalyst refers to
an event that triggers a significant change in the price or volume of a
financial instrument, whether it’s stocks, commodities or currencies.</p><blockquote class=”twitter-tweet”><p lang=”en” dir=”ltr”>The market revolves around Supply and demand with Humans being the main catalyst that result in the 3rd factor being added to the equation Which results in Chaos occuring giving rise to the highest form of order</p>— THE CHOSEN ONE (@fx_margin_call) <a href=”https://twitter.com/fx_margin_call/status/1617797916525203457?ref_src=twsrc%5Etfw”>January 24, 2023</a></blockquote><p>However, you need
to know that price movements are not limited to obvious events such as the
release of an economic dataset. Often the uncertainty surrounding how a market will react to an upcoming
release keeps many professional traders out of the market. This creates a low
liquidity environment that is subject to fast spike increases and decreases in
price. </p><p>In the upcoming
video, as an illustration, you’ll see how market participation evaporates upon
an important news release. But, the important question is, how can you uncover
trading catalysts outside of news and data releases?</p><p>Three Examples of
Catalysts to Improve Trade Outcome Odds</p><p>Here are three
examples to assist you in thinking through possible catalysts.</p><ol>
<li>A counter move occurs in the
market you trade when an XYZ market opens. Not an elaborate idea, so not a
large payer, but it’s a catalyst that leads to tradable price movement. In
my case, I exclusively trade AUD/USD futures intraday. And, whether it’s
the futures or <a href=”https://www.financemagnates.com/institutional-forex/institutional-spot-fx-demand-slows-in-february-after-post-holiday-boost/” target=”_blank” rel=”follow”>spot FX market</a>, both move in the same direction. When you
think about the role of currency markets and who the large players are
(commercials and hedgers), you can appreciate the relationship currencies
have with other markets. When stock markets around the globe open and
close, the AUD/USD is subject to move. The reasons go beyond this article.
However, relative value and trading across exchanges is common in the
institutional space. When one market opens or closes, it impacts
positioning in a currency market.</li>
</ol><p>2.
Lifting COVID restrictions in China is a boost economically. A move up
in markets, even if short-lived, is likely, but difficulties of investing in
China mean traders look to express the trade via a proxy market. Look for the
idea, followed by the proxy market to move in tandem. The second idea is more advanced; hence, it provides a higher payout catalyst to the first idea. In the
case of the AUD/USD, there are institutions and hedge funds around the globe
that will express their Chinese Stock Market investments via AUD/USD.</p><blockquote class=”twitter-tweet”><p lang=”en” dir=”ltr”>Pretty incredible moves in markets today, most notably in FX. Rumors of China dropping covid zero has led to the biggest one day rise in AUDUSD in 10 years. <a href=”https://t.co/8qk5uHjq6f”>pic.twitter.com/8qk5uHjq6f</a></p>— Jon Turek (@jturek18) <a href=”https://twitter.com/jturek18/status/1588536469617987584?ref_src=twsrc%5Etfw”>November 4, 2022</a></blockquote><p>3.
Another scenario is a situation where the market considers a rate
hike as a foregone conclusion even as all other factors also point to an
increase in cash rate that will be bullish for the currency. In this type of
scenario, forward-thinking traders consider the <a href=”https://www.financemagnates.com/thought-leadership/the-united-states-and-new-zealand-now-roughly-have-the-same-interest-rates/” target=”_blank” rel=”follow”>rate hike</a> as already priced as it was before the official announcement and, therefore, <a href=”https://www.financemagnates.com/thought-leadership/5-things-to-consider-before-short-selling-stocks/” target=”_blank” rel=”follow”>enter short</a> on the release.
When this type of situation happens, after an initial push-down in price, you
can opt for a catalyst as a short squeeze.</p><blockquote class=”twitter-tweet”><p lang=”en” dir=”ltr”>FX markets once again reflect the rise and fall of nations. Ruble not weakest currency ytd, but once again <a href=”https://twitter.com/hashtag/Turkey?src=hash&ref_src=twsrc%5Etfw”>#Turkey</a> Lira. Appreciation of Brazil Real and SA Rand remarkable in the year of the start of Fed-rate-hike cycle. Europe’s decline is reflected in Euro’s loss vs the Dollar. <a href=”https://t.co/LTb3JLaNPx”>pic.twitter.com/LTb3JLaNPx</a></p>— Holger Zschaepitz (@Schuldensuehner) <a href=”https://twitter.com/Schuldensuehner/status/1509785090510966804?ref_src=twsrc%5Etfw”>April 1, 2022</a></blockquote><p>Watch a Real-Time
Catalyst in AUD/USD: </p><p>Using live trading
mentoring as an illustration, say you find an analysis that produces a
hypothesis that suggests an upward move in price. What’s the catalyst?</p><p>In the video below,
you can watch the crafting of a hypothesis followed by waiting for a catalyst
to move the price before the trade is entered. </p><p>Short sellers, who
entered the trade responding to unemployment data only to find themselves the
target of a short covering rally, act as the catalyst to spark an upward
movement in price as per the trading hypothesis. </p><p>Please note that
all three examples given in this article show that trading catalysts can vary
from extensively researched data to simple observations. Start with simple
catalysts to build up your confidence and momentum. </p><p>Stick to the simple
ones, and you’ll find yourself progressing naturally towards uncovering more
sophisticated catalysts. </p>
This article was written by Adam Fiske at www.financemagnates.com.
