Broadly speaking, inflation is a general increase in prices which result in a fall in the purchasing value of money. In this article, we are going to look at measures of inflation and other indicators that can help traders to detect early signs of inflation. Traders try to follow the inflationary pressures to anticipate the next interest rate move by central banks.
If the central bank sees that inflationary pressures are building up and that economic growth is accelerating, they can decide to raise the interest rate to combat inflation and slow down the economy. Producer Price Index (PPI) and Consumer Price Index (CPI) are widely used measures of inflation. PPI tracks wholesale price inflation while CPI follows retail price inflation.
As the name entails, PPI and CPI follow the changes in prices from the Producer’s and Consumer’s point of view respectively. PPI can be viewed as the leading indicator because higher producer prices will eventually be passed on to consumers.Therefore, PPI and CPI figures allow traders to forecast the central bank’s next move about the interest rate. Early Warning Signs of inflation There are other factors that can help traders to see that inflation is building up ahead of the release of PPI and CPI figures.
In doing so, forex traders are better able to trade inflation data more confidently. Consumer Confidence and Retail Sales These two economic data provide investors with an indication of the health of the consumers. Consumer Confidence offers an essential insight into the demand for goods and services regardless of consumers’ financial situation.
Consumers are likely to spend if they feel confident about the overall economy. Similarly, Retail Sales help to measure the trends in consumer spending which could cause investors to rethink the direction of interest rates. Labour Market and Wages - (Unemployment rate, Jobless Claims and Average Earnings) Employment rate helps to detect whether there is a shortage or oversupply of labour.
The simple demand and supply diagram of the labour market will provide you with the direction of wages when there are changes in the labour market. Wage inflation therefore translates into more spending and adds to inflationary pressures. Housing Market - (House Prices and Mortgage approvals) The correlation between the housing market and inflation can be a complex one.
However, for this article, we will look at house prices and interest rates. When interest rates are low, buying houses become more affordable. Depending on demand and supply, any change in house prices or mortgage approvals will provide insights on the inflationary outlook.
Inflation is critical for the Forex markets as it can exert a considerable influence on the exchange rate of a currency. Because central banks tend to adjust interest rate to fight inflation or deflation, forex traders monitor inflationary pressures very closely. It helps them to forecast whether the next move of the central bank will put downward or upward pressure on the currency.
By
GO Markets
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Every trader has had that moment where a seemingly perfect trade goes astray.
You see a clean chart on the screen, showing a textbook candle pattern; it seems as though the market planets have aligned, and so you enthusiastically jump into your trade.
But before you even have time to indulge in a little self-praise at a job well done, the market does the opposite of what you expected, and your stop loss is triggered.
This common scenario, which we have all unfortunately experienced, raises the question: What separates these “almost” trades from the truly higher-probability setups?
The State of Alignment
A high-probability setup isn’t necessarily a single signal or chart pattern. It is the coming together of several factors in a way that can potentially increase the likelihood of a successful trade.
When combined, six interconnected layers can come together to form the full “anatomy” of a higher-probability trading setup:
Context
Structure
Confluence
Timing
Management
Psychology
When more of these factors are in place, the greater the (potential) probability your trade will behave as expected.
Market Context
When we explore market context, we are looking at the underlying background conditions that may help some trading ideas thrive, and contribute to others failing.
Regime Awareness
Every trading strategy you choose to create has a natural set of market circumstances that could be an optimum trading environment for that particular trading approach.
For example:
Trending regimes may favour momentum or breakout setups.
Ranging regimes may suit mean-reversion or bounce systems.
High-volatility regimes create opportunity but demand wider stops and quicker management.
Investing time considering the underlying market regime may help avoid the temptation to force a trending system into a sideways market.
Simply looking at the slope of a 50-period moving average or the width of a Bollinger Band can suggest what type of market is currently in play.
Sentiment Alignment
If risk sentiment shifts towards a specific (or a group) of related assets, the technical picture is more likely to change to match that.
For example, if the USD index is broadly strengthening as an underlying move, then looking for long trades in EURUSD setups may end up fighting headwinds.
Setting yourself some simple rules can help, as trading against a potential tidal wave of opposite price change in a related asset is not usually a strong foundation on which to base a trading decision.
Key Reference Zones
Context also means the location of the current price relative to levels or previous landmarks.
Some examples include:
Weekly highs/lows
Prior session ranges, e.g. the Asian high and low as we move into the European session
Major “round” psychological numbers (e.g., 1.10, 1000)
A long trading setup into these areas of market importance may result in an overhead resistance, or a short trade into a potential area of support may reduce the probability of a continuation of that price move before the trade even starts.
Market Structure
Structure is the visual rhythm of price that you may see on the chart. It involves the sequences of trader impulses and corrections that end up defining the overall direction and the likelihood of continuation:
Uptrend: Higher highs (HH) and higher lows (HL)
Downtrend: Lower highs (LH) and lower lows (LL)
Transition: Break in structure often followed by a retest of previous levels.
A pullback in an uptrend followed by renewed buying pressure over a previous price swing high point may well constitute a higher-probability buy than a random candle pattern in the middle of nowhere.
Compression and Expansion
Markets move through cycles of energy build-up and release. It is a reflection of the repositioning of asset holdings, subtle institutional accumulation, or a response to new information, and may all result in different, albeit temporary, broad price scenarios.
Compression: Evidenced by a tightening range, declining ATR, smaller candles, and so suggesting a period of indecision or exhaustion of a previous price move,
Expansion: Evidenced by a sudden breakout, larger candle bodies, and a volume spike, is suggestive of a move that is now underway.
A breakout that clears a liquidity zone often runs further, as ‘trapped’ traders may further fuel the move as they scramble to reposition.
A setup aligned with such liquidity flows may carry a higher probability than one trading directly into it.
Confluence
Confluence is the art of layering independent evidence to create a whole story. Think of it as a type of “market forensics” — each piece of confirmation evidence may offer a “better hand’ or further positive alignment for your idea.
There are three noteworthy types of confluence:
Technical Confluence – Multiple technical tools agree with your trading idea:
Moving average alignment (e.g., 20 EMA above 50 EMA) for a long trade
A Fibonacci retracement level is lining up with a previously identified support level.
Momentum is increasing on indicators such as the MACD.
Multi-Timeframe Confluence – Where a lower timeframe setup is consistent with a higher timeframe trend. If you have alignment of breakout evidence across multiple timeframes, any move will often be strengthened by different traders trading on different timeframes, all jumping into new trades together.
3. Volume Confluence – Any directional move, if supported by increasing volume, suggests higher levels of market participation. Whereas falling volume may be indicative of a lesser market enthusiasm for a particular price move.
Confluence is not about clutter on your chart. Adding indicators, e.g., three oscillators showing the same thing, may make your chart look like a work of art, but it offers little to your trading decision-making and may dilute action clarity.
Think of it this way: Confluence comes from having different dimensions of evidence and seeing them align. Price, time, momentum, and participation (which is evidenced by volume) can all contribute.
Timing & Execution
An alignment in context and structure can still fail to produce a desired outcome if your timing is not as it should be. Execution is where higher probability traders may separate themselves from hopeful ones.
Entry Timing
Confirmation: Wait for the candle to close beyond the structure or level. Avoid the temptation to try to jump in early on a premature breakout wick before the candle is mature.
Retests: If the price has retested and respected a breakout level, it may filter out some false breaks that we will often see.
Then act: Be patient for the setup to complete. Talking yourself out of a trade for the sake of just one more candle” confirmation may, over time, erode potential as you are repeatedly late into trades.
Session & Liquidity Windows
Markets breathe differently throughout the day as one session rolls into another. Each session's characteristics may suit different strategies.
For example:
London Open: Often has a volatility surge; Range breaks may work well.
New York Overlap: Often, we will see some continuation or reversal of morning trends.
Asian Session: A quieter session where mean-reversion or range trading approaches may do well
Trade Management
Managing the position well after entry can turn probability into realised profit, or if mismanaged, can result in losses compounding or giving back unrealised profit to the market.
Pre-defined Invalidation
Asking yourself before entry: “What would the market have to do to prove me wrong?” could be an approach worth trying.
This facilitates stops to be placed logically rather than emotionally. If a trade idea moves against your original thinking, based on a change to a state of unalignment, then considering exit would seem logical.
Scaling & Partial Exits
High-probability trade entries will still benefit from dynamic exit approaches that may involve partial position closes and adaptive trailing of your initial stop.
Trader Psychology
One of the most important and overlooked components of a higher-probability setup is you.
It is you who makes the choices to adopt these practices, and you who must battle the common trading “demons” of fear, impatience, and distorted expectation.
Let's be real, higher-probability trades are less common than many may lead you to believe.
Many traders destroy their potential to develop any trading edge by taking frequent low-probability setups out of a desire to be “in the market.”
It can take strength to be inactive for periods of time and exercise that patience for every box to be ticked in your plan before acting.
Measure “You” performance
Each trade you take becomes data and can provide invaluable feedback. You can only make a judgment of a planned strategy if you have followed it to the letter.
Discipline in execution can be your greatest ally or enemy in determining whether you ultimately achieve positive trading outcomes.
Bringing It All Together – The Setup Blueprint
Final Thoughts
Higher-probability setups are not found but are constructed methodically.
A trader who understands the “higher-probability anatomy” is less likely to chase trades or feel the need to always be in the market. They will see merit in ticking all the right boxes and then taking decisive action when it is time to do so.
It is now up to you to review what you have in place now, identify gaps that may exist, and commit to taking action!
One of the most impactful books I’ve ever read is “The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change” by Stephen Covey.
When it was first published in 1989, it quickly became one of the most influential works in business and personal development literature, and retained its place on bestseller lists for the next couple of decades.
The compelling, comprehensive, and structured framework for personal growth presented in the book has undoubtedly inspired many to rethink how they organise their lives and priorities, both professionally and personally.
Although its lessons were originally designed for self-improvement and positive structured growth, the underlying principles are universal, making them easily transferable to many areas of life, including trading.
In this article, you will explore how each of Covey’s seven original habits can be reframed within a trading context, in an attempt to offer a structure that may help guide you to becoming the best trader you can be.
1. Be Proactive
Being proactive means recognising that we have the power to choose our responses and to shape outcomes through appropriate preparation with subsequent planned reactions.
In a Trading Context:
For traders, this means anticipating potential problems before they arise and putting measures in place to better mitigate risk.
Rather than waiting for issues to unfold, the proactive trader identifies potential areas of concern and ensures that they have access to the right tools, resources, and people to prepare effectively, whatever the market may throw at them.
What This Means for You:
Being proactive may involve seeking out quality education and services, maintaining access to accurate and timely market information, continually assessing risk and opportunity, and having systems to manage those risks within defined limits.
Consequences of Non-Action:
Inadequate preparation and a lack of defined systems often lead to poor trading decisions and less-than-desired outcomes.
Failing to assess risk properly can result in significant and often avoidable losses.
By contrast, a proactive approach builds resilience and confidence, ensuring that when challenges arise, your response is measured and less emotionally driven by what is happening on the screen in front of you.
2. Begin with the End in Mind
Covey's second habit is about defining purpose. It suggests that effective people are more likely to achieve what is possible if they start with a clear understanding of their destination, so every action aligns with that ultimate vision.
In a Trading Context:
Ask yourself: What is my true purpose for trading?
Many traders may instinctively answer “to make money,” but money is surely only a vehicle to achieve something else in your world for you and those you care about, not a purpose per se.
You need to clarify what trading success really means for you.
Is it a greater degree of financial independence through increased income or capital growth, the freedom of having more time, achieving a personal challenge of becoming an effective trader, or a combination of any of these?
What This Means to You:
Try framing your purpose as, “I must become a better trader so that I can…” and complete a list with your genuine reasons for tackling the market and its challenges.
This helps you establish meaningful short-term development goals that keep you moving toward your vision. Keep that purpose visible, as a note near your trading screen that reminds you why you are doing this.
Consequences of Non-Action:
Traders with a clearly defined purpose are more likely to stay disciplined and consistent.
Those without one often drift, chasing short-term gains without direction. There is ample evidence that formalising your development in whatever context through goal setting can significantly increase the likelihood of success. Why would trading be any different?
Surely the bottom-line question to ask yourself is, “Am I willing to risk my potential by trading without purpose?”
3. Put First Things First
This habit is about time management and prioritisation. This involves focusing your efforts and energy on what truly matters. As part of the exploration of this concept, Covey emphasised distinguishing between what is important and what is merely urgent.
In a Trading Context:
Trading demands commitment, learning, and reflection.
It is not just about screen time but about using that time effectively.
Managing activities to ensure your effort is spent wisely on planning, measuring, journaling and performance evaluation, and refining systems, accordingly, are all critical to sustaining both improvements in results and balance.
What This Means to You:
Traders often believe they need to spend more time trading when what they really need is to focus on better time allocation.
It is logical to suggest that prioritising activities that can often contribute directly to improvement, such as system testing, reviewing performance, analysing results, and refining your strategy, is worthwhile.
These high-value tasks can help traders focus their time more deliberately and systematically.
Consequences of Non-Action:
If you fail to control your trading time effectively, you will be more likely to spend much of it on low-impact activities that produce little progress.
Over time, this not only hurts your results but also reduces the real “hourly value” of your trading effort.
In business terms, and of course, you should be treating your trading as you would any business activity; poor prioritisation can inflate your costs and diminish your potential trading outcomes.
4. Think Win: Win
Covey's fourth habit encouraged an attitude of mutual benefit, where seeking solutions that facilitate positive outcomes for all parties.
In a Trading Context:
In trading, this concept must be adapted to suggest that developing a mindset that recognises every well-executed plan as a win, even when an individual trade results in a loss.
Some trading ideas will simply not work out, and so some losses are inevitable, but if they remain within defined limits, they should not be viewed as failures but rather as a successful adherence to a trading plan. In the aim of developing consistency in action, and the widely held belief that this is one of the cornerstones of effective trading, then it surely is a win to fulfil this.
So, in simple terms, the real “win” lies in a combination of maintaining discipline, following your system, and controlling risk beyond just looking at the P/L of a single trade.
What This Means to You:
Building and trading clear, unambiguous systems that you follow consistently has got to be the goal.
This process produces reliable data that you can later analyse and subsequently use to refine specific strategies and personal performance.
When you do this, every outcome, whether profit or loss, can serve as valuable feedback.
For example, a controlled loss that fits your plan is proof that your system works and that you are protecting your capital.
Alternatively, a trailing stop strategy, which means you exit trades in a timely way and give less profit back to the market, provides positive feedback that your system has merit in achieving outcomes.
Consequences of Non-Action:
Without this mindset shift, traders can become emotionally reactive, interpreting normal drawdowns as personal defeats.
This fosters loss aversion and other biases that can erode decision-making quality if left unchecked. Through the process of redefining “winning,” you are potentially safeguarding both your capital and, importantly, your trading confidence (a key component of trading discipline).
5. Seek First to Understand and Then Take Action
Covey's fifth habit emphasises empathy, the act of listening and aiming to fully understand before responding. In trading, this principle translates to understanding the market environment before taking any action.
In a Trading Context:
Many traders act impulsively, driven by excitement or fear, which often results in entering trades without taking into account the full context of what is happening in the market, and/or the potential short-term influences on sentiment that may increase risk.
This “minimalisation bias,” defined as acting on limited information, will rarely produce consistent results. Instead, adopt a process that begins with observation and comprehension.
What This Means to You:
Establishing a daily pre-trading routine is critical. This may include a review of key markets, sentiment indicators, and potential catalysts for change, such as imminent key data releases. Understanding what the market is telling you before you decide what to do is the aim of having this sort of daily agenda.
This approach may not only improve trade selection but also enable you to get into a state of psychological readiness that can facilitate decision-making quality throughout the session.
Consequences of Non-Action:
Failing to prepare for the trading day ahead can mean not only exposing yourself to unnecessary risk but also arguably being more likely to miss potential opportunities.
A trader who acts without understanding is vulnerable both psychologically and financially. Conversely, being forewarned is being forearmed. When you aim to understand markets first before any type of trading activity, your actions are more likely to be deliberate, grounded, and more effective.
6. Synergise
Synergy in Covey's model means valuing differences and combining the strengths of those around you to create outcomes greater than the sum of their parts.
In a Trading Context:
In trading, synergy refers to the integration of multiple systems and disciplines that work together. This includes your plan, your record keeping and performance management processes, your time management, and your emotional balance.
No single system is enough; success comes from the synergy of elements that support and inform one another.
What This Means to You:
Integrating learning and measurement is an integral part of your trading development process. Journaling, for example, allows you to assess not only your technical performance but also your behavioural consistency.
This self-awareness allows you to refine your plan and so helps you operate with greater confidence.
The synergy between rational analysis and emotional composure is what is more likely to lead to consistently sound trading decisions.
Consequences of Non-Action:
When logic and emotion are out of balance, decision-making will inevitably suffer.
If your systems are incomplete, ambiguous, or poorly connected to the reality of your current level of understanding, competence and confidence, your results are likely to be inconsistent. Building synergy across all areas of your trading practice, including that of evaluation and development in critical trading areas, will help create cohesion, efficiency, and better performance.
7. Sharpen the Saw
Covey's final habit focuses on continuous learning and refinement, including maintaining and improving the tools at your disposal and skills and knowledge that allow you to perform effectively.
In a Trading Context:
In trading, this translates to creating a plan to achieve ongoing, purposeful learning.
Even small insights can make a large difference in results. Effective traders continually refine their knowledge, ask new questions, and apply lessons from experience.
What This Means to You:
Trading learning can, of course, take many forms. Discovering new indicators that may offer some confluence to price action, testing different strategies, exploring new markets, or simply understanding more about yourself as a trader.
There is little doubt that active participation in learning keeps you engaged, adaptable and sharp. Even making sure you ask at least one question at a seminar or webinar or making a simple list at the end of each session of the "3 things I learned", can be invaluable in developing momentum for your growth as a trader.
Your record-keeping and performance metrics should generate fresh questions that can guide future development.
Consequences of Non-Action:
Without direction in your learning, your progress is likely to slow.
I often reference that when someone talks about trading experience in several years, this is only meaningful if there has been continuous growth, rather than staying in the same place every year (i.e. only one year of meaningful experience)
Passive trading learning, for example, reading an article without applying, watching a webinar without engagement, or measuring without closing the circle through putting an action plan together for your development, can all lead to stagnation.
It is fair to suggest that taking shortcuts in trading learning is likely to translate directly into shortcuts in result success.
Active, focused development is essential for sustained improvement.
Are You Ready for Action?
Stephen Covey’s The 7 Habits of Highly Effective People presented a timeless model for self-development and purposeful living.
When applied to trading, these same habits form a powerful framework for consistency, focus, and growth.
Trading is a pursuit that demands both technical skill and emotional strength. Success is rarely about finding the perfect system, but about developing the right habits that support consistent, rational decision-making over time.
By integrating the principles of Covey’s seven habits into your trading practice, you create a foundation not only for profitability but for continual personal growth.
A market bubble occurs when asset prices rise far beyond any reasonable valuation.
It is driven by speculation, emotion, and the belief that prices will continue rising indefinitely.
For traders, the challenge is more about finding a way to manage a bubble, rather than just identifying that one exists.
By their very nature, bubbles can persist far longer than any logical analysis suggests. There are opportunities as they develop, but timing their peak is virtually impossible.
Understanding their characteristics and having a systematic way of managing bubbles in your trading strategy is worth considering for any trader.
What is a Bubble?
Market bubbles have distinct features that separate them from normal bull markets or even overvalued conditions for a particular asset:
Dramatic Price Appreciation Disconnected From Fundamentals
In a bubble, traditional valuation metrics become meaningless.
Company or asset fundamentals that usually matter to market participants are ignored in the hope of what might be.
Cash flow, profit margins, competitive positioning, and (in some cases) producing revenue may be dismissed.
Widespread Participation And "This Time Is Different" Narratives
Bubbles require mass market participation.
When every headline you see or article you read references "this time is different," or "the old rules don't apply anymore," it is a sign that the collective psychology has shifted from normal caution.
Social media may begin to explode with ever more frequent success stories, and for the individual trader, the fear of missing out becomes increasingly overwhelming.
Credit and Leverage Fuelling Demand
Bubbles are typically accompanied by easier credit conditions.
When interest rates are lowered and investors are confident in general economic conditions, any spare cash is put to work.
In stock or other market bubbles, you may see retail traders maxing out credit cards to buy call options, with the put/call ratio becoming increasingly distorted.
This leverage often amplifies the rise and the eventual fall, making the risk even more acute and potentially damaging to trader capital.
Vertical Price Charts in Final Stages
One of the telltale signs of a bubble's final phase is a parabolic price chart.
Prices seem to go up daily, and every minor pullback is short-lived (creating more buying pressure).
This is the euphoria stage. It is where the greatest danger is.
The fear of missing out on further moves is at its highest, and a logical willingness to take profit off the table diminishes in the minds of ever more excited traders.
New participants may continue to enter solely for the way the price is appreciating. Entering into the move only understanding that what they are buying is going up, so they want to join in too.
Bubble vs. Overvalued: Key Differences
Not every expensive market is a bubble. Several characteristics distinguish a bubble from a simpler and far less dangerous overvaluation:
Elevated Valuations With Reasoned Fundamental Justification
An overvalued market has stretched valuations, but can point to real supporting factors (at least to some degree).
Examples include strong earnings growth, low interest rates, disruption in service or productivity, and providing genuine temporary value.
Even if prices respond to less obvious immediate influencing factors, such as international events, policy changes, and supply issues, the fact that some factors justify continued positive sentiment (even if somewhat unfulfilled) is a positive sign.
Linear or Steady Uptrend
Overvalued markets tend to grind higher with a more sustainable trend rather than a vertical spike. There are normal corrections along the way, even if the highs and lows of a fluctuation are higher.
Reasonable Participation Levels
There is evidence of institutional investors buying on any dips, but common retracements last days or even weeks.
Retail participation exists but isn't frenzied and plastered all over social media every day or referenced in mainstream media consistently.
Some Scepticism Still Exists
There will be some legitimate and contrary opinions about valuations. Major financial media will present both bearish and bullish cases when a stock is discussed.
Trading Strategies for Potential Bubble Management
Here is the scenario: You bought early in the up move, you are now in profit, but some of the bubble signs are beginning to show up in your thinking.
Tiered Profit-Taking Strategies
Don't try to pick the top. As an alternative approach, begin to scale out systematically with partial closes. This will alleviate the potential for FOMO creeping in.
You could stage this with set points, e.g. sell 30% when you've doubled, another 30% when you've tripled, 20% when conditions clearly show evidence of entering bubble territory and, having banked a substantial profit already, you keep the final 20% with a trailing stop for the final run if it happens.
Trailing Stops With Wider Bands to Accommodate Volatility
Let’s assume you see the merit in some form of trial stop. In bubble conditions, normal stop distances will get you whipsawed out. Use percentage-based trailing stops or ATR multiples with enough room to accommodate bigger intraday moves.
For example, if your norm is to trail your stop 1.5 x ATR behind price at the end of every candle, then in increasingly volatile conditions during a parabolic move, consider 2,5 x ATR to allow room to move while still offering protection against price collapse.
Reduce Position Sizing and Leverage
The temptation in bubbles is to maximise gains by increasing your margin and entering more and more positions in one asset.
High leverage and significant single asset exposure in bubble conditions is a potential death sentence to trading capital.
Recognising the added risks you are contemplating before entry is critical. Combining this with an approach that reduces position sizing and increases margin requirements is consistent with good trading practice as risk increases.
Planned and Rigid Exits
Before buying, you should have already made decisions on what exit approaches you should take and the parameters at which they will be executed,
Having the exit plan as you enter can limit the chance of getting trapped by greed. Neglecting this and focusing on the opportunity alone can be disastrous.
Never Assume You Can Time the Top
It is usually a big mistake if you believe you will recognise the exact top and exit perfectly. Let’s be frank, even if you hit it lucky once, you won't be able to every time — no one does.
Recognise Behavioural Biases That May Affect Your Judgment
Bubbles can create powerful psychological forces.
Anchoring bias may mean that you fixate on peak prices. Confirmation bias makes you seek information supporting your bullish view and ignore opposing evidence. Recency bias makes you believe the recent trend will continue indefinitely.
The indisputable key to any bias management is awareness and honesty that some markets may just not be for you (or if they are, to proceed with extreme and continuous caution).
Psychological Preparation for Rapid Reversals
Mentally rehearse the worst scenario and clarity of planned action, e.g., “if it drops 10% in three days, I will ….”.
Having thought through your response and armed with unambiguous exits in advance will make execution easier when emotions run high and begin to dominate.
Final Thoughts
Extreme valuations, little fundamental underpinning, parabolic price action, and universal bullishness should be part of your bubble identification checklist and flag that your bubble action plan should be implemented.
If you are already in, or tempted to be so, then approach bubbles with honesty, awareness of your trading self and extraordinary discipline to follow through, as predicting what and when things may dramatically turn is close to impossible.
Never forget you are not smarter than the market, but you can (potentially) be smarter than many traders by planning and doing the right thing.
Asia open: what matters after the Venezuela headlines
Asia starts the week with a fresh geopolitical shock that is already being framed in oil terms, not just security terms. The first-order move may be a repricing of risk premia and volatility across energy and macro, while markets wait to see whether this becomes a durable physical disruption or a fast-fading headline premium.
At a glance
What happened: US officials said the US carried out “Operation Absolute Resolve”, including strikes around Caracas, and that Venezuela’s President Nicolás Maduro and his wife were taken into US custody and flown to the United States (subject to ongoing verification against the cited reporting).
What markets may focus on now: Headline-driven risk premia and volatility, especially in products and heavy-crude-sensitive spreads, rather than a clean “missing barrels” shock.
What is not happening yet: Early pricing has so far looked more like a headline risk premium than a confirmed physical supply shock, though this can change quickly, with analysts pointing to ample global supply as a possible cap on sustained upside.
Next 24 to 72 hours: Market participants are likely to focus on the shape of the oil “quarantine”, the UN track, and whether this stays “one and done” or becomes open-ended.
Australia and Asia hook: AUD as a risk barometer, Asia refinery margins in diesel and heavy, and shipping and insurance where the price can show up in friction before it shows up in benchmarks.
What happened, facts fast
Before anyone had time to workshop the talking points, there were strikes, there was a raid, and there was a custody transfer. US officials say the operation culminated in Maduro and his wife being flown to the United States, where court proceedings are expected.
Then came the line that turned a foreign policy story into a markets story. President Trump publicly suggested the US would “run” Venezuela for now, explicitly tying the mission to oil.
Almost immediately after that came a message-discipline correction. Secretary of State Marco Rubio said the US would not govern Venezuela day to day, but would press for changes through an oil “quarantine” or blockade.
That tension, between maximalist presidential rhetoric and a more bureaucratically describable “quarantine”, is where the uncertainty lives. Uncertainty is what gets priced first.
Source: Adobe images
Why this is price relevant now
What’s new versus known for positioning
What’s new, and price relevant, is that the scale and outcome are not incremental. A major military operation, a claimed removal of Venezuela’s leadership from the country, and a US-led custody transfer are not the sort of things markets can safely treat as noise.
Second, the oil framing is explicit. Even if you assume the language gets sanded down later, the stated lever is petroleum. Flows, enforcement, and pressure via exports.
Third, the embargo is not just a talking point anymore. Reporting says PDVSA has begun asking some joint ventures to cut output because exports have been halted and storage is tightening, with heavy-crude and diluent constraints featuring prominently.
What’s still unknown, and where volatility comes from
Key unknowns include how strict enforcement is on water, what exemptions look like in practice, how stable the on-the-ground situation is, and which countries recognise what comes next. Those are not philosophical questions. Those are the inputs for whether this is a temporary risk premium or a durable regime shift.
Political and legal reaction, why this drives tail risk
The fastest way to understand the tail here is to watch who calls this illegal, and who calls it effective, then ask what those camps can actually do.
Internationally, reaction has been fast, with emphasis on international law and the UN Charter from key partners, and UN processes in view. In the US, lawmakers and commentators have begun debating the legal basis, including questions of authority and war powers. That matters for markets because it helps define whether this is a finite operation with an aftershock, or the opening chapter of a rolling policy regime that keeps generating headlines.
Market mechanism, the core “so what”
Here’s the key thing about oil shocks. Sometimes the headline is the shock. Sometimes the plumbing is the shock.
Venezuela’s heavy-crude system: Orinoco production, key pipelines, and export/refining bottlenecks
Volumes and cushion
Venezuela is not the world’s swing producer. Its production is meaningful at the margin, but not enough by itself to imply “the world runs out of oil tomorrow”. The risk is not just volume. It is duration, disruption, and friction.
The market’s mental brake is spare capacity and the broader supply backdrop. Reporting over the weekend pointed to ample global supply as a likely cap on sustained gains, even as prices respond to risk.
Quality and transmission
Venezuela’s barrels are disproportionately extra heavy, and extra heavy crude is not just “oil”. It is oil that often needs diluent or condensate to move and process. That is exactly the kind of constraint that shows up as grade-specific tightness and product effects.
Reporting has highlighted diluent constraints and storage pressure as exports stall. Translation: even if Brent stays relatively civil, watch cracks, diesel and distillates, and any signals that “heavy substitution” is getting expensive.
Heavy-light spread as a stress gauge: rising differentials can signal costly substitution and tighter heavy supply.
Products transmission, volatility first, pump later
If crude is the headline, products are the receipt, because products tell you what refiners can actually do with the crude they can actually get. The short-run pattern is usually: futures reprice risk fast, implied volatility pops; physical flows adapt more slowly; retail follows with a lag, and often with less drama than the first weekend of commentary promised.
For Australia and Asia desks, the bigger point is transmission. Energy moves can influence inflation expectations, which can feed into rates pricing and the dollar, and in turn affect Asia FX and broader risk, though the links are not mechanical and can vary by regime.
Some market participants also monitor refined-product benchmarks, including gasoline contracts such as reformulated gasoline blendstock, as part of that chain rather than as a stand-alone signal.
Historical context, the two patterns that matter
Two patterns matter more than any single episode.
Pattern A: scare premium. Big headline, limited lasting outage. A spike, then a fade as the market decides the plumbing still works.
Pattern B: structural. Real barrels are lost or restrictions lock in; the forward curve reprices; the premium migrates from front-month drama to whole-curve reality.
One commonly observed pattern is that when it is only premium, volatility tends to spike more than price. When it is structural, levels and time spreads move more durably.
The three possible market reactions
Contained, rhetorical: quarantine exists but porous; diplomacy churns; no second-wave actions. Premium bleeds out; volatility mean-reverts.
Escalation, prolonged control risk: “not governing” language loses credibility; repeated operations; allies fracture further. Longer-duration premium; broader risk-off impulse across FX and rates.
Australia and Asia angle
For Sydney, Singapore, and Hong Kong screens, this is less about Venezuelan retail politics and more about how a Western Hemisphere intervention bleeds into Asia pricing.
AUD is the quick and dirty risk proxy. Asia refiners care about the kind of oil and the friction cost. Heavy crude plus diluent dependency makes substitution non-trivial. If enforcement looks aggressive, the “price” can show up in freight, insurance, and spreads before it shows up in headline Brent.
Catalyst calendar, key developments markets may monitor
US policy detail: quarantine rules, enforcement posture, exemptions.
UN and allies: statements that signal whether this becomes a long legitimacy fight.
In 2025, the S&P 500 traded around 6,835 and was up approximately 16% year to date (YTD). Market direction remained most sensitive to Federal Reserve expectations, inflation data and the earnings outlook, with returns also shaped by mega-cap tech leadership and the broader AI narrative. The index pulled back from earlier December highs, but it has so far held above key major moving averages (MA).
Key 2025 drivers included:
Fed expectations and inflation: Inflation cooled through the year but remained sticky around 2.5% to 3%. A Fed easing bias likely supported price to earnings (P/E) multiples and “risk-on” positioning. More recently, markets appeared increasingly rate-sensitive, with the decreased likelihood of an additional rate cut until March 2026.
Earnings and guidance: Corporate earnings remained strong quarter on quarter. Recent Q3 results reportedly saw over 80% of the S&P 500 beat earnings per share (EPS) expectations. For Q4, the estimated year-over-year earnings growth rate is 8.1%, despite ongoing concerns around import tariffs and potential margin pressure.
Index leadership and breadth: Returns were heavily influenced by mega-cap tech and AI beneficiaries, even as broader market breadth appeared less consistent at points through the year.
Policy headlines and volatility: Trade and tariff headlines drove sharp moves, particularly earlier in the year. Some investors pointed to the “TACO” trade, with rapid recoveries after policy proposals were softened. Over time, similar shocks appeared to have less impact as the market became somewhat desensitised.
Valuations and sensitivity: The forward 12-month P/E ratio for the S&P 500 is 22, above the 5-year average (20.0) and above the 10-year average (18.7). That gap kept valuation sensitivity, especially in AI-linked names, firmly in focus.
Current state
The S&P 500 is about 1% below record highs hit earlier in December. That could indicate the broader uptrend remains in place, with a move back toward the recent highs one possible scenario if momentum improves. Despite the recent retracement, the index remains above all key major moving averages (MA). The latest bounce followed lower than expected CPI numbers earlier this week, alongside continued, and to some, surprising optimism about what may come next.
What to watch in January
Q4 earnings from mid-January: Results and guidance may help clarify whether valuations are being supported by forward expectations.
AI narrative and positioning: With AI-linked mega-caps carrying a large share of market capitalisation, changes in sentiment or expectations could have an outsized impact on index performance.
US jobs and CPI data: The latest US jobs report reportedly points to the highest headline unemployment rate since 2021. Cooling inflation this week may keep markets alert to shifts in rate cut timing, particularly around the March decision.
S&P 500 daily chart
Source: TradingView
Major FX pairs
Source: Adobe Images
AUD/USD
AUDUSD has been choppy in 2025. Since the “redemption day” drop in April, the move has looked more like a steady grind higher than a clean upside trend.
Key levels Recent peaks in early September and mid-December highlight resistance near 0.6625. Support has been evident around 0.6425, where price bounced over the last month.
What is supporting the bounce That support test coincided with stronger than expected jobs and inflation data, lifting expectations that the Reserve Bank of Australia (RBA) may raise rates during 2026 rather than cut again. The latest pullback looks contained so far, with buying interest already visible and price still above key longer-term moving averages.
What could drive a breakout The pair remains range-bound, but the tilt is still constructive. If Chinese data stays firm, metals prices hold up, and the central bank outlook remains relatively hawkish, a break above resistance could gain more traction.
AUD/USD daily chart
EUR/USD
After early 2025 euro strength, EURUSD has mostly consolidated since June in a roughly 270 pip range. This month tested 1.18 resistance, reaching highs not seen since September.
What price is doing now The recent pullback still lacks strong downside conviction. Some technical analysts refer to the 1.17 area as a near-term reference level.
What could come next If price holds 1.17 and buyers step back in, another push toward 1.18 is possible. One view is that the European Central Bank (ECB) could be less inclined to ease in 2026, which could be consistent with a firmer EURUSD scenario. Broader analyst commentary also suggests the euro may stall rather than collapse against the US dollar, although outcomes remain data and policy dependent.
EUR/USD daily chart
USD/JPY
Year-to-date picture USDJPY is close to flat overall for the year. After US dollar weakness in Q1, the pair reversed higher and now sits just below resistance near 158.
Rates remain the main driver Rate differentials still favour the US dollar. The Bank of Japan (BOJ) held steady for much of the period despite expectations it might act, and the recent rate increase was modest. Policy has only moved marginally away from zero.
What could shift the balance Rate differentials remain a key influence. Without a clearer shift in BOJ policy, the JPY may find it difficult to sustain a rebound. Some market commentators cite 154.20 as a chart reference level.
In 2025, the ASX 200 closed around 8,621 points and was up approximately 6% year to date (YTD) as of 19 December close. Market direction was most sensitive to Reserve Bank of Australia (RBA) expectations, commodity prices and China-linked demand, and (to a lesser extent) moves in the Australian dollar (AUD). The index recovered from November’s pullback, but remained below October’s record close.
Key 2025 drivers included:
RBA policy expectations: Sentiment was shaped by shifting views on the timing and extent of rate moves. The November pullback reflected repricing towards a longer pause and higher uncertainty around whether the next move could be a hike rather than a cut, particularly as jobs and inflation data surprised.
Resources and China sensitivity: With a meaningful resources weight, the index responded to iron ore stability, strong gold prices and relative firmness in base metals. China data and any perceived policy support (including signals from the People’s Bank of China (PBOC)) remained important for the export backdrop. A relatively stable AUD also reduced currency-related noise for exporters.
Index composition and market structure: The ASX 200’s heavier tilt to materials and banks, and lower exposure to high-growth technology, meant it often lagged tech-led global rallies, but tended to hold up better when AI and growth valuations were questioned.
Corporate earnings: Reporting season outcomes influenced valuation support. In September’s half-year reporting season, around 33% of ASX 200 companies beat expectations, which helped underpin pricing around current levels.
Current state
The ASX 200 was roughly 5% below its late-October record high close of 9,094 points. After the November retracement, support around 8,400 appeared to hold and buying interest improved. The 50-day EMA near 8,730 (a prior consolidation area) was a commonly watched near-term reference, noting technical indicators can be unreliable.
What to watch in January
China and commodity demand: Growth, trade and any fresh stimulus inference from the PBOC may affect sentiment.
Domestic inflation and labour data: CPI and jobs prints are key inputs into RBA expectations.
Key levels and follow-through: The post-November rebound may need continued demand to sustain momentum.
Source: Trading View
What moved the Nikkei 225 in 2025?
In 2025, the Nikkei 225 traded around 39,200 points and was up approximately 21% year to date (YTD). Market direction was most sensitive to moves in the Japanese yen (JPY) and Bank of Japan (BOJ) communication, with the index consolidating after multi-decade highs. While broader signals remained constructive, consolidation can resolve either higher or lower.
Key influences included:
JPY movements and earnings translation: A weaker JPY can boost the reported value of overseas earnings for some exporters, although it may also increase input and import costs. The net impact often depends on company hedging practices and varies by sector, with effects most evident in export-heavy industries such as automotive, industrials and parts of technology manufacturing.
Gradual BOJ policy transition: The BOJ continued to step away from ultra-easy settings, but tightening was generally cautious. Markets largely priced a slow, conditional normalisation, which helped limit downside, even as policy headlines created bouts of volatility.
Corporate governance reforms: Ongoing improvements in capital efficiency and shareholder returns supported interest from overseas investors. Share buybacks, stronger balance-sheet discipline and improved return on equity (ROE) contributed to re-rating in parts of the market.
Global cyclical exposure: The Nikkei moved with shifts in global manufacturing sentiment and expectations for US growth, particularly during risk-on phases associated with AI-related capital spending.
Current state
After pushing to multi-decade highs earlier in the year, the Nikkei spent time consolidating but has remained structurally strong. Price sits above key long-term moving averages, and some technicians watch the 50-day exponential moving average (EMA) as a potential reference level (noting these indicators can be unreliable). Currency swings and shifting BOJ expectations were commonly cited as contributors to much of the second-half volatility, although pullbacks were generally met with buying interest.
What to watch in January for Japan
JPY volatility: Sharper yen moves, especially if driven by BOJ or Federal Reserve expectations, could quickly change exporter earnings assumptions.
BOJ communication: Small changes in language on inflation persistence or bond market operations may move sentiment.
Global growth data: US and China manufacturing and trade prints remain key inputs for an externally focused economy.
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