FREE DOWNLOAD: http://www.highvelocitymarketmaster.com/capitalgrowth/ -- Capital Growth App! NFP days can be great to illustrate how markets move because they really have the potential to motivate traders to act. Not only is there the potential for a lot of movement, but there’s usually a good mix of different types of participant active in the markets – and it can be really important to know who’s trading and why on these sort of days. see more: http://www.netpicks.com/know-whos-trading/

1. Know who’s trading and why
http://www.netpicks.com/know-whos-trading/

2. NFP days can be great to illustrate how
markets move because they really
have the potential to motivate traders
to act.

3. Not only is there the potential for a lot
of movement, but there's usually a
good mix of different types of
participant active in the markets - and
it can be really important to know
who's trading and why on these sort of
days.

4. Okay so the backdrop to all of this is
that central bank policies are the main
driver right now for the markets as a
whole. The QE programs that many
central banks have implemented since
the financial crisis have become
somewhat of an obsession and even
an addiction for the markets.

5. The Federal Reserve's QE was no
exception. As economies become
more stable however, the issue is that
QE and low interest rates can lead to
high levels of inflation if left
unchecked.

6. So fundamental news such as NFP's,
inflation data, central bank
meetings/minutes and whatever else
they say they are currently looking at,
tends to bring about a surge in activity
due to the heightened level of
importance it currently has.

7. With the Fed basically saying that they
will raise rates at some point fairly
soon, the NFP release which is pretty
important anyway, gives the markets
an opportunity to figure out the likely
impact of jobs growth (amongst other
important jobs data that's released at
the same time).

8. Scalpers, swing traders, banks, funds
and everyone else are all therefore
likely to be active.

9. Day traders frequently struggle to grasp
the relationship between different markets
and unfortunately, because these
relationships sometimes seem so clear,
they start to lean on them as a tool to help
in making context-based trading decision,
only to find that they don't hold.

10. For example, day traders commonly
believe that the relationship between
stocks and bonds is an inverse one.
When stocks go up, bonds go down.
And this is something that can happen.

11. But the relationship is usually not
directly between the stock index and
the bond themselves - whatever the
relationship appears to be is a
consequence of what is driving the
overall market. In this case the driver is
the Fed interest rate policy.

12. In essence when interest rates go up,
bond prices discount this and as low
rates are meant to be supportive to an
economy, stock markets go down. So
given that both stocks and bonds could
sell off in anticipation of higher
interest rates,

13. can you tell the difference between
the 2 charts below of a stock index and
a bond?

15. Okay so maybe the prices in these
charts will give you a clue to which
one's which, but they are very similar
especially over the final day where
NFP's were released.

16. Trying to trade one against the other
with expectations of an inverse
relationship would've proved costly.

17. Understanding the potential drivers is
however, just the first stage if you are
going to be trading on a day like last
Friday.

18. The next stage is to have a plan for
what you think will happen and
therefore what you might do, given
the various possibilities of how the
data might come out relative to
expectations.

19. This doesn't have to be a well-
documented plan, it's just good to
have an idea of what could happen,
before the event itself.

20. For the NFP release, the expectation
was ~ +235k and the previous figure
was +257k. If it came out in line with
or close to analyst expectations, then
expectations of what the Fed might do
with rates would be the same.

21. A much lower number (at least below
+185k) and the Fed might think twice
about raising rates in the near term.
Much higher (at least above +285k)
and the Fed might have to consider
accelerating the process of moving
towards raising rates.

22. It came out at strong +295k with the
previous revised lower by 18k - an
overall +42k.

23. Liquidity, short-term news players and
probably the various other numbers
released played a hand in an initial pop
higher, but then the last scenario
played out with the stocks and bonds
moving lower for much of the session.

24. The final stage is of course, to see how
the market actually reacts to the
release as you never know what will
happen.

25. But if you know who's trading and why
or at least have a good idea, you're
going to have a much better idea of
what could happen when big numbers
are significantly different to
expectations and the likely extent of
subsequent moves.

26. Recognizing this behavior when you
see it will help you switch gears and
make sure you're on the right side of
the move.