Is the narrative in play?Check the story before you trade it.
You can have the right direction and the right entry, and still lose. Often the reason is the narrative: the market is trading a different story right now, and your idea isn’t in sync with it.
Right analysis, wrong story
Markets are driven by many factors, but at any moment only some of them are being traded. That is the current narrative, the story the market reads every number through, as the module on context showed. If your idea isn’t in sync with it, the market can move against you even when your analysis is right.
This is why you follow the market every day. Your notes on the session recaps, headlines and data releases show you which story is in play, and sometimes they tell you not to trade a currency at all.
The Aussie and the war
Say you are bullish on the Australian dollar, and your analysis is sound. Then a war breaks out.
The Australian dollar is a risk-on currency, and a war is a risk-off event: investors move into safer assets and demand for the Aussie drops, as the lesson on geopolitics and safe havens showed. Your bullish case may still be right over time, but right now the market is trading fear.
So even with a bullish view, you might stay away from the Australian dollar for now. Your analysis still stands, but the story the market is trading has changed.
Check the mood
The risk sentiment indicator in Prime Terminal shows the market’s overall mood: confident or fearful. Before you trade a currency, check whether that mood suits it. A risk-on currency in a risk-off market is swimming against the current, however good its own data looks.
Don’t explain every wiggle
One trap to avoid is the rabbit hole of explaining every small move, like every candle on a 5-minute chart. Some moves have no news behind them at all: no data release, no geopolitical event and no central bank speaker.
Traders take profit, and price pulls back. A big company exchanges billions into another currency to fund its operations, and a pair moves without a headline. Or a trend that started days ago, after a shift in the risk mood or the fundamental outlook, simply continues. A shift like that can set the direction for days, weeks or even months.
You don’t need a reason for every wiggle. You need to know the bigger story, and whether the market is trading it.
A narrative check before every trade
Before you trade, check that your idea fits the narrative the market is trading right now. Write your idea and its reason in one sentence. Next, write the 1 or 2 themes the market is focused on today, from the session recaps and the headlines: the ones that move several currencies at once are usually the ones being traded. Then check the mood.
If your idea needs the story that is in play, it is ready for the next step. If it needs the opposite mood or a different theme, mark it “not in play yet”, keep it on your watchlist and check again tomorrow.
The market is trading your story
Move on to timing and the entry.
- Your idea fits today’s main theme
- The mood suits the currency
- Price reacts to news in your favour
The market is trading something else
Keep it on the watchlist.
- Another theme dominates the recaps
- The mood works against the currency
- Good news for it gets ignored
In short
- Only some factors are traded at any moment. That is the narrative, and your idea needs to be in sync with it, even when your analysis is right.
- A bullish view on the Australian dollar can wait when a war breaks out: the Aussie is a risk-on currency, and a war turns the market risk-off.
- Don’t explain every 5-minute move. Profit taking, corporate flows and older trends move price too, so focus on the bigger story and whether it is in play.
Key terms
- Narrative
- The story the market currently trades, for example “the Fed will cut soon”. Data that fits the story moves price more.
- Risk-on and risk-off
- Risk-on: investors feel confident and buy stocks and higher-yielding currencies. Risk-off: they get nervous and move into safe havens.
- Safe haven
- An asset investors buy when they are scared, such as the Japanese yen, the Swiss franc, gold or US government bonds.
- Sentiment
- The mood of the market: how traders feel and how they are positioned. It often decides the timing of a move.
- Session recap
- A short summary of what moved the market in a trading session and why.