What’s Moving the Market?
Trade with the Engine

How to Identify and Trade the Market’s Main Drivers

There’s always a story, always something traders are watching.
​
Something the market is super sensitive to, which changes all the time.
​
How can we discover the engine and use it to create edge?

The Engine

The market moves on sentiment, right?

Sure, the valuation and fundamentals work out in the wash over time, but it’s the short-term sentiment that drives price discovery.

  • Optimistic and hopeful – prices rise
  • Pessimistic and fearful – prices fall

Financial media needs a story du jour, a theme they can use to explain price movements.

And we’ve had a few over the years:

  • Gold price
  • Oil price
  • Yen price
  • Capture of Bin Laden
  • Presidential elections
  • European debt crisis
  • Global financial crisis
  • Inflation
  • Chinese economy
  • Pandemics
  • Wars
  • Sector booms and busts

You get the idea…

Traders are always watching something which moves the market.

Right now, it’s inflation and interest rates.

Next few months, it will be the US elections.

After that – who knows.

Our Job

So how does this impact traders like us?

#1 We need to be informed.

  • What is the market engine?
  • Where is the headline risk?
  • What’s the current sentiment?
  • What needs to change to move things massively?
  • What are current expectations?

No amount of key levels or technical patterns will stand up to breaking unexpected news related to the market’s engine.

So we need to be prepared and start thinking several moves ahead.

#2 Don’t get sucked in

It’s easy to get sucked into news flow, the day-to-day over-analysis of things that don’t really matter.

If you do that, you become over-sensitive to headlines and start reacting and positioning to things that aren’t really relevant.

The sweet spot is to be informed and clear on the impact of certain headlines.

Eg: Powell changes his language slightly about inflation = dull

CPI number comes in way hotter than expected = fire

You might get an initial market reaction to both, but if you know the market’s engine and what really fuels money flow, you can assess the headline, make a judgement on its potential impact, and be more confident in your trade positioning.

Rather than just reacting to a price spike, not really knowing if it’s likely to follow through or mean revert.

As eyes start to focus on the US election, watch how inflation headlines move the market vs election headlines. When election stuff has more impact, that’s the new engine.