My first internship was working for Bear Stearns long ago. I was cold-calling potential clients for stockbrokers trying to spread the news on the attractive offerings that we had to offer. One day, when I was tired of pitching Paramount as takeover target, I was perusing the Wall Street Journal and stumbled on to some interesting story. I don’t remember the company that the WSJ was mentioning but I do remember what my respective stockbroker said that day when I showed him the article: “It’s yesterday’s news, kid. Who cares. Find me the company that will be making headlines tomorrow”.
I didn’t take any offense to what he said as he is right because when you are trading equities you should not be trading ‘yesterday’s news’. Equities gap, and they gap quite sizably from day to day. When a story comes out, the market-maker will adjust the price accordingly. Thus, if you are trying to buy or sell a security that just had news, you will not be receiving yesterday’s closing price. Not even close.
Luckily in the currency markets there are no individual market-makers that control the spot prices. Just imagine if you were a trader this week and wanted to buy EUR/JPY after the China central bank announcement regarding the CNY. If you had to go through a market-maker you’d probably pay an additional 30-50 pips as the market initially saw this as a reflection of confidence on the global economy. Of course in the end the announcement from China was considered not such a big deal and EUR/JPY would eventually collapse. Luckily you probably figured this out and would have gotten out of your trade close to even. If you had paid the market-maker the additional 30-50 pips then it would have been similar to buying a house in the US in 2007 and trying to sell today. Ouch. Similar to the real estate market trading equities is far from always being a liquid and transparent market. If they could offer liquid equity markets throughout the day then don’t you think they would do so?
I harp on another instance where all markets were caught by surprise which is on February 18th of this year. This is when the Fed raised the discount rate by 25 bps to 0.75%. They did this action 30 minutes after US equities closed their normal trading session. So as an equity trader if you wanted to be involved you had to stray outside your favored market as your market was closed! Hopefully you didn’t buy or sell too many futures contracts as those become very expensive in a hurry. Currency traders could have just clicked “Mine” or “Yours” and if you felt your trade had gone to its limits you could have closed it out at any time.
There is nothing like trading the markets profitably when the market-makers have all gone home or are stuck on a subway and may be oblivious to current market events!
If you want to trade a market on a short-term basis there is only one market to trade which also happens to be the world’s largest market, the foreign exchange market.
This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.