Want to outright gamble with your money while you trade—or would you rather take a calculated risk instead?
Now, I guess that we all gamble to some degree, but you won’t find me playing blackjack in Las Vegas or Atlantic City. Still if I did play blackjack (or 21, as it’s sometimes known), I would make sure to control the risks by learning to count cards.
Here’s why: Blackjack is one casino game where you can change the odds slightly in your favor by counting cards and knowing what’s left in the deck. The Theory of Blackjack by Peter Griffin suggests that card counting can give a player up to a 2 percent edge over the dealer. Doesn’t sound like much, but over the long run this seemingly slight edge can lead to success. That’s exactly what most people should be looking for when they trade. Just a small edge can make a big difference.
Over the years that I have analyzed the forex market for Elliott Wave International and for a George Soros-affiliated hedge fund, I have learned that many traders automatically lighten up on positions in front of scheduled news events. These events often cause knee-jerk reactions, just like always “hitting” on 14 or always splitting a pair in 21. The problem is that these reactions to news don’t always pan out the way traders think they should.
THE SECRET TO GETTING AHEAD OF NEWS
So would you like to be able to position yourself ahead of the news to take advantage of how the market will react? Knowing the basics of Elliott wave analysis can give you an edge over all the other gamblers—I mean traders—at the financial markets table.
Since I follow currencies for Elliott Wave International, I focus here on two foreign exchange examples from the past few months to show how I counted waves, in lieu of cards, in advance of a regularly scheduled news event to take advantage of the market’s actual reaction to the news. [See the sidebar “What Is Elliott Wave Analysis?” for the basics on five-wave and three-wave patterns.]
Here’s my secret for getting in position ahead of the news: I look at the charts in the minutes prior to a scheduled news event to try to identify a wave pattern that is potentially at an end. If I find one, then I have identified an edge.
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FOMC MEETING MINUTES
Consider the May 21 release of the minutes for the April 29-30 U.S. Federal Open Market Committee (FOMC) meeting. Reading those minutes, you would realize that the quarter-point rate cut was a “close call.” You would also learn that Federal Reserve board members were not in agreement about cutting rates in the future, even in the...