What a rip! Oh, boy, did this trade pay, and here's why

 

For months now, every RBA cash rate announcement, the $AUD rallied pre and post the release.

As referenced in the prior post, the $AUD macro theme changed as of Jan 15

Taken from my pre-market work (image below) , "value" is shifting to the downside. There is a newly traded area where relative value players have been participating.

 
2021-02-03_15-07-25.png
 

Could the RBA rate day rally continue given the change in the macro theme?

Pre the release, $AUD moved to the upside, as if the theme was continuing. We traded the move up for its entirety until it finally ceased just minutes before RBA announced (that's not typical by the way).

But during the move to the upside, I could see institutional size building a short position around key relative value zones.

With the increased recent volatility, there has been frequent switching between risk-on and risk-off. Pre RBA the DOW overnight futures and ASX were both up firmly, and as it's been the recent case, $AUD moved up with it.

Can you already see the story unfolding for the $AUD?

 
2021-02-03_15-53-18.png
 

I mentioned I traded the upside-move (scaling in and out along the way until finally flat pre-RBA), so by 14:29 AEST, having worked five hours straight, I took a break. (I like to let the market settle after tier 1 data, making it an ideal time to schedule breaks)

By the time I returned, I'd missed a significant move to the downside. The entire upside move had retraced.

However, I now knew the RBA theme was over, and I'd witnessed significant short positioning. Yet the downside move didn't represent a sufficient payout for such a trade's magnitude. I hypothesised there was more to go.

 
2021-02-03_15-55-14.png
 

Key to this was the level as per my daily observations at 0.7627. I identified large buying as shorts banking some partial profits.

 
2021-02-03_16-45-34.png
 

These prints attracted smaller buyers misreading this covering as initiating, thinking they can bottom-pick knowing size was on their side. Expecting these bottom pickers to be washed out, I started a short-selling campaign, stopped-out moments later for a loss.

 
2021-02-03_16-08-40.png
 

As price surged upward, prepared to abandon my short hypothesis, I was looking to participate in a short-covering rally.

But I never got long. The move was not due to shorts covering. A market maker or HFT or both repeatedly lifted the offer, and FOMO traders chased hook, line and sinker.

Able to differentiate between the varying factors driving price I had the final piece of evidence, my short hypothesis was on the right track. Now I could commit to a significant play. I waited for the "nonsense" to end and leaning on a transition area at 0.7635; I worked into the trade which was covered when capitulation signalled an end to the move.

 
2021-02-03_16-08-39.png
 

I wrote this post to illustrate:

  1. How trading one instrument develops an accumulative depth of understanding enough of the competition doesn't have.

  2. Incorporating market observations and themes to build hypotheses (pre-market work) leads to the best-paying trades

  3. How trading professionally requires a broadly developed skill set (essential trading skills)

  4. and how all of the above leads to recognising and acting on "uncrowded" trade opportunities.

  5. I have a process that helps me surrender my actions to what the market tells me. The market is like the "big boss" if you like.

 
Adam Fiske