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Trading Catalysts: How Events Move Markets and Create Trading Opportunities

Book Description

In Trading Catalysts, Robert I. Webb examines the various factors that move markets. Webb focuses on the catalysts that spark the biggest price changes–and the greatest potential for substantial profits or losses. Using numerous real market examples, Webb demonstrates the often inconsistent response of prices to similar trading catalysts across markets and over time, the occasional significantly delayed response, and the frequent market overreaction. Whether traders bet directly on a trading catalyst, on the presumed market reaction (or overreaction) to it, or not at all, the potential impact on market prices and volatility means that all traders must pay attention to trading catalysts and the market reactions that they induce. At the very least, the prospect of significant volatility around some event may affect the timing of a trader’s entry or exit of positions and may cause a trader to reduce his position size. If you’re a serious trader, this book will help you understand the influence of trading catalysts and identify potential trading opportunities.

Volatile financial markets create both the risk of substantial losses and the opportunity for substantial gains. Sudden jumps or breaks in prices can impart a roller-coaster-ride-like quality to trading or investing in financial markets. Trading Catalysts is the first complete guide to the events that spark large changes in prices. These include: central bank actions; ill-advised comments by policymakers; news of natural disasters; elections; certain economic reports; terrorism; company specific announcements; the unwinding of large positions by key market participants; and simple trading errors among others. The varied origin of trading catalysts means that some traders may have an edge in anticipating the market’s reaction to certain trading catalysts. Numerous real market examples take the reader into the heart of the market to illustrate the direction, magnitude, speed, duration, intensity and breadthof influence of trading catalysts on market prices. Because a minute can be a “lifetime” in the world of trading, many of the detailed examples recount moment-by-moment and tick-by-tick changes in market prices. This book discusses the role that trading theses(or prevailing beliefs about market relationships), market conditions,and sentimentplay in determining how prices react and sometimes overreact to various trading catalysts over time. Trading Catalysts will help readers anticipate potential events that could spark rallies or breaks; predict situations with feedback loops that drive markets up or down; and identify situations where substantial overreactions are likely to occur.

Table of Contents

  1. Copyright
    1. Dedication
  2. Financial Times Press
  3. About the Author
  4. Preface
    1. Endnote
  5. 1. Introduction
    1. Federal Reserve Rate Cut Announcement
    2. Analyzing the Market Reaction
    3. The Nature of Trading Catalysts
    4. Do Perceived Trading Catalysts Really Influence Market Prices?
    5. Trading Catalysts and Market Efficiency
    6. Trading Is a Game
    7. Trading Off of Catalysts
    8. References
    9. Endnotes
  6. 2. Market Conditions and Sentiment
    1. Treasury Announcement Discontinuing Issuance of 30-Year Bonds
    2. Market Conditions, Sentiment, and Trading Catalysts
    3. Treasury Announcement of Potential Resumption of 30-Year Bond Issuance
    4. Trading Lessons
    5. References
    6. Endnotes
  7. 3. Talk Isn’t Cheap
    1. Irrational Exuberance
    2. Comments by Politicians and Policymakers as Trading Catalysts
    3. Greenspan Speaks and Markets Move
    4. Other Voices at the Fed
    5. The Asian Financial Crisis
      1. Broken Promises
      2. Speculation or Fundamentals?
      3. A Trading Pattern Emerges
      4. Other Voices Impact the FX Market
      5. Speech Is Silver
    6. Mr. Yen
    7. Lost in Translation
    8. Trading Lessons
    9. References
    10. Endnotes
  8. 4. Geopolitical Events
    1. War with Iraq
    2. Geopolitical Events as Trading Catalysts
    3. The Arrest of Mikhail Khodorkovsky
    4. Elections
      1. May 2004 Indian Parliamentary Election
      2. The Brazilian Presidential Election of 2002
      3. 1992. Maastricht Treaty Referendum
      4. 2005. European Union Constitution Referenda
    5. Terrorist Actions
      1. September 11, 2001
      2. Madrid Train Bombings, March 11, 2004
      3. Terror in London, July 7, 2005
    6. Impeachment of South Korean President Roh Moo-hyun
    7. Coup d’Etat: The Gorbachev Ouster
    8. Trading Lessons
    9. References
    10. Endnotes
  9. 5. Weather and Natural Disasters
    1. A Tale of Two Natural Disasters
    2. Natural Disasters as Trading Catalysts
      1. Contamination of the Food Supply: Mad Cow Disease
      2. Potential Epidemics and Pandemics: SARS
    3. Weather Conditions
    4. Other Natural Disasters
      1. Hurricane Andrew and Prepayment Speed
      2. The Chicago Flood
      3. The San Francisco Earthquake
    5. Trading Lessons
    6. References
    7. Endnotes
  10. 6. Market Interventions
    1. A Tale of Two Market Interventions
      1. Central Banks Defend the Euro
      2. Tapping the Strategic Petroleum Reserve
    2. Market Interventions as Trading Catalysts
      1. Defending the Indefensible
    3. The Hong Kong Monetary Authority Intervenes in the Stock Market
    4. Trading Lessons
    5. References
    6. Endnotes
  11. 7. Periodic Economic Reports
    1. The Trade Deficit Sparks a Bond Market Rout
    2. The Trade Deficit Sparks a Bond Market Rally
    3. Scheduled Economic Reports
    4. What Is Fundamental Economic Information?
    5. Noise and Information
    6. Trade Selection and Trade Horizon
    7. Trading Lessons
    8. References
    9. Endnotes
  12. 8. Size Matters
    1. Blood in the Water 1: Sumitomo Is Long and Wrong
    2. Blood in the Water 2: The Yen Suddenly Rises
    3. Internal Market Catalysts
    4. Order Size as a Trading Catalyst
      1. Electronic Trading Games: Citigroup Hits All Bids—August 2004
      2. Size Matters: March 1996 CBOT Wheat Futures
      3. Trade Execution Matters
    5. Precursor to the 1987 Crash
    6. Trading Lessons
    7. References
    8. Endnotes
  13. 9. Bubbles, Crashes, Corners, and Market Crises
    1. The Silver Corner
    2. Internal Market Catalysts
    3. The Crash of 1987
    4. Asian Financial Crisis and Market Contagion
    5. Trading Lessons
    6. References
    7. Endnotes
  14. 10. The Accidental Catalyst
    1. The Large Cost of Small Errors
    2. Lost in Translation
    3. Dollars or Shares?
    4. Trading Lessons and Summary
      1. Market Conditions, Sentiment, and Trading Theses
      2. Trading Is a Game
      3. News: Information Versus Noise
      4. The Origin of Trading Catalysts
      5. Extreme Events
    5. References
    6. Endnotes