💵 The Anatomy of High Impact Market Events

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Traders are attracted to high impact events (such as yesterday's CPI) like moths to flames. They know they shouldn't, but it's just so beautiful...

The way price moves, the speed, the adrenalin, it's exciting, stimulating, a chance to make fortunes. Or so we tend to think.

For a short term trader, high impact events are a recipe for disaster. People forget that markets are ultra-competitive playgrounds, and think that somehow they've cracked the code.

Because they focus on price.

Err yeah. We make money by positioning for price changes. What else are we supposed to focus on?

Price and liquidity.

One of the biggest risks to any trading account is liquidity scarcity. No liquidity to fill trading orders means that those orders are left unfilled, or filled at the next best price, which is often a LONG way away from the desired price...

Every trader goes through this experience at some point in their progression. Just something you learn the hard way. Slippage picks up all of your careful risk management and throws it straight out the window.

I vividly remember a Bank of Canada meeting early on in my trading life. Things didn't go as planned.... A 20 pip stop became 80 pips. Couldn't believe I had 60 pips slippage on my 'stop'. My clever, unbeatable plan was thwarted. The trading account took some damage...

Some time later, I was shown how the order book basically disappears before a large risk event. You can watch the DOM/Ladder and see the number of resting orders fall away in the run up to an event.

If you want to take a slightly more agricultural approach without even looking at a futures platform, you stick a volume profile on the 1 second chart like this 👇

That profile covers the 5 seconds immediately after the CPI release. That top segment above the top blue line/value area saw little, if any business done.

In the first second alone, price moved from 12580.25 to 12512.25. Almost 70 points.

By the fifth second, we'd fallen to 12460.25, a 120 point move from high to low.

"Woah, if I could capture a move like that, I'd make loadsa money"

If it was that easy, we'd all be doing it...

The lack of resting liquidity renders the price moves essentially irrelevant. The vast majority of orders will be left unfilled (or filled a long way from desired prices) during that time.

Here's another agricultural example 👇

Adding the basic volume bars to the bottom of the chart. In that first one second window after the release, volume was 404 across a 70 point range.

In the 30th second, volume was higher at 478 across a much smaller 23 point range.

Volatility is a product of illiquidity. Just because price moves there, don't presume that every order gets filled at that price.

In FX, Last Look is a very common tool:

In other words, a Liquidity Provider (LP) can simply decide not to fulfill a trade request for the 'Liquidity Consumer' (LC) - i.e. the trader 👇

So that covers the illiquidity and risks/difficulties of getting orders filled immediately around a big release.

Which brings us to the next question. If those price moves are a function of liquidity seeking behaviour, how much should we read into the price movement? 👇

Usually, not much at all. In this case, definitely not much at all...

There's a clear point of control in the current range. We traded either side of that POC, and we're still trading around there now, over 24 hours later.

That's not always the case, but most of the time, there's nothing much to do around high impact events.

Sure you can trade, maybe try and fade the overshoots after the first minute or two of chaos pass and market makers are back in the game.

But from a fundamental perspective, unless the data is well out of line, why rush in and risk a bad fill?

Why be the moth hypnotised by the flame?