Different asset classes respond in many different ways to various fundamental developments. You can have short-term Treasury Notes selling-off because the central bank is tightening monetary policy.

By extension, an FX pair can be in an uptrend because the central bank of the currency that is appreciating is raising interest rates while the central bank of the currency that is depreciating is cutting interest rates.

You can also have different equity sectors responding in different ways to the economic cycle with cyclical stocks falling during hard times and defensive stocks, on the other hand, rising.

Building Trading Strategies

When you build your trading idea you should find a market where your idea can be expressed in the best possible way giving you good asymmetric bets. This process will also keep you disciplined as you will look only for the highest conviction trades and refrain from taking trades just out of boredom. Remember that your job is not to trade but to make money.

Let’s see an example. Imagine you have two central banks beginning to tighten their monetary policy and the risk sentiment picture is murky. Given that, you can have the corresponding FX pair just ranging and not giving you any high probability trade.

What you can do though is to trade the short-term treasury notes as a tighter policy will cause a sell-off in those securities. In this way you reduce your risk and increase your chances of success at the same time.

With more experience you’ll start to notice that when you have a high conviction in your trade, because you clearly see the reasons for taking a position, your psychological pressure will be much lower compared to the times when you force trades trying to outsmart the market. As the saying goes “when in doubt, stay out”.