市場新聞與洞察

We have been discussing Sahms’ law for the last few weeks. This is the regression indicator that signals the possibility of recession. For those that can't remember, Sahms' recession indicator is when the three-month moving average of the unemployment rate has risen by more than 0.5 per cent from the previous 12 month low.

Every time this has happened since 1950 the US has entered a recession. Which brings us to last Friday’s non-farm payroll (NFP). NFP August jobs report revealed that total nonfarm payrolls grew by just 142,000, while private sector job growth amounted to a meagre 118,000.

That is the lowest read since COVID and both figures fell well short of consensus expectations. Even more concerning, revisions to June and July payrolls subtracted a combined 86,000 jobs, further underscoring the weakness in the labour market. That is on top of the 816,000 downward revisions of the January through May figures which saw the NFP overestimating the monthly employment figures by 69,000.

The next piece of the puzzle – a piece that backs the Sahms’ law puzzle is the three-month average for private sector job growth has now fallen below 100,000 per month, a pace that typically signals the onset of a recession.. However some are pointing to the fact that the unemployment rate ticked down slightly from 4.3 per cent to 4.2 per cent in August as a mixed signal and that maybe things aren’t as bad as the headlines. However this modest improvement was largely due to rounding, as the unrounded rate was effectively unchanged (4.22 per cent in August vs. 4.25 per cent in July).

This followed an earlier increase in unemployment, which had been trending higher over the past few months. The rise in the unemployment rate, combined with slowing job growth, indicates that the labour market is likely to weaken further unless the Fed moves to ease policy – which is why we are asking – has the Fed dropped the ball by not moving already? Let’s explore that further Data from the Job Openings and Labor Turnover Survey (JOLTS) shows that firms are hiring at the slowest rate in a decade, outside of the pandemic period.

Job openings fell to 7.673 million in July, which was significantly faster than expected and brought the ratio of job openings to unemployed persons to 1.07-to-1, down from the elevated levels seen during the pandemic. This decline in job openings suggests that the labour market is normalising, but it also raises the risk of a sharper increase in unemployment in the coming months as the ratio inverts. It's not only the multitude of employment indicators flashing risk.

Other indicators reinforce the case for concern. Take the auto sales numbers, which fell below expectations, with an annualised sales rate of 15.1 million vehicles, suggesting there is now a slowdown in consumer spending. The decline in auto sales historically spreads to weaker production and employment in the auto industry, as companies adjust staffing levels in response to reduced demand.

Meanwhile, mortgage applications for new home purchases remain subdued despite a drop in mortgage rates over the last four months on rate cut expectations. The lacklustre performance in both the auto and housing markets adds to the broader picture of economic weakness. The signs are pretty clear- the slowdown is on and as the Fed weighs its options ahead of the September meeting – the final piece of the puzzle is coming inflation.

It must be said that inflation remains a key focus. Core Consumer Price Index (CPI) inflation is expected to rise by just 0.2 per cent month-on-month in August, reinforcing the view that inflation has slowed considerably, but year on year CPI is still above the Fed 2 per cent target. Inflationary pressures are easing and the greater risk to the Fed's mandate appears to be the labour market rather than inflation, but it could be the moderator on those calls for the Fed to go hard when it starts cutting.

We need to watch categories like medical services and airfares as these are ones we need to see bigger falls in the rates of price growth and could influence the Fed's decision-making. But again, the overall trend suggests inflation is no longer the primary concern. Similarly, the Producer Price Index (PPI) is expected to show a modest increase of 0.2% month-over-month, further indicating that inflationary pressures are tapering off.

Jobless claims data will also be closely watched in the coming weeks. Continuing claims are expected to rebound after an unexpected drop, driven in part by a temporary decline in claims in Puerto Rico. Any significant rise in jobless claims, particularly initial claims, could signal a shift towards more active layoffs.

Can they catch the ball? All the data mentioned highlight our concerns about the trajectory of the U.S. economy. There are clear signs of a substantial slowdown and growing risk of recession.

Thus the question now is can the Fed catch slowdown before it turns into a recession? The answer is muddled as the Federal Reserve's response to the weakening outlook remains uncertain. The base case is for the Fed to initiate a series of rate cuts in the coming months.

Currently, projections indicate that the Fed may cut rates by 50 basis points (bp) in September followed by a smaller 25 bp cuts over the proceeding meetings. However, the pace and magnitude of these cuts remain open to adjustment, depending on the evolving economic conditions. While this is the view of the market, the Fed is not as united as this – for example: Federal Reserve Governor Christopher Waller has expressed a more measured approach.

In his September 6, 2024 speech, Waller emphasised that he prefers to see more data before endorsing larger rate cuts of 50 bp rather than the more conservative 25 bp. He signalled that the Federal Open Market Committee (FOMC) needs to remain flexible and should adjust its actions based on new data rather than adhering to preconceived timelines for rate cuts. The issue with this view is that data is retrospective and by the time it's presented it would be too late to catch the slowdown.

He expressed willingness to support larger cuts if the data shows further deterioration, drawing parallels to his previous support for front-loading rate hikes when inflation surged in 2022. But again – the argument against this stance is it could be too little too late. Waller’s remarks suggest that the Fed could adopt a cautious approach in September, potentially starting with a 25 bp cut but leaving room for larger cuts if economic data continues to weaken at either the November or December meeting.

So could the Fed drop the ball? We think the word to use here is “fumble”. There are clear signs of disagreements around, size, speed and effects of cuts, which may cause them to fumble the response in the interim, over the medium term it will align, whether they catch or drop the ball – time will tell.

In short – we are in for a volatile period in FX, already the USD has been falling on rate fundamentals, but rallies on recession fears. The drive to safe havens over risk plays will be a strong theme in the coming period and will likely override any interest rate differential trade plays that present. It is going to be an interesting period culminating in the US election in November, thus be ready to be nimble and accept swings that seem to go against traditional trading theories.

We will do a deep dive into how to trade the upcoming US Federal Reserve meeting on Wednesday but for now we need to address the Fed and others from an Australian traders perspective as it is one of 3 plays we need to be mindful of. 1. Hard or Soft – Can we stick the landing? All central banks across the developed world are doing summersaults, with a one and half twist to land their respective economies with a soft landing.

And this is increasingly seeing them align towards coordinated easing – barring the RBA more on that later. The debate between soft and hard landings in the global economy is accelerating. For example, traders have begun to notice that there is a switch in trade from the previously held trade of bad economic data that was often seen as good for risk assets, as it increased the likelihood of monetary easing.

To the now, poor data is also being traded as negative for risk, reflecting growing fears that economic weakness could be deeper and more prolonged than anticipated. We have highlighted this point through the US employment data and the slowing numbers in GDP. Equity markets clearly believe they will stick the landing with record all -time high trading in the DOW, S&P and most other major bourses including the ASX 200.

But they have yet to fully account for the potential downside risks of a hard landing scenario. In fact, equities have a bigger divergence that could spell trouble if central banks get it wrong as it is really only a small group of high-performing sectors or stocks that are driving gains, while many others lag. This narrow leadership, combined with elevated valuations, raises concerns about the market's vulnerability should the hard landing scenario materialise.

This brings us to Thursday’s Federal Reserve meeting – it will cut the expectations for a 25-basis point cut at the upcoming September meeting sits at 42 percent the bigger 50-basis point cut sits at 62 per cent. This has led to increased debate around market positioning and sector rotation. The Fed’s recent communications have largely endorsed the beginning of an easing cycle at a slow pace.

But that hasn’t stopped traders putting in an upward repricing - the bull steepening of the yield curve, particularly led by short-term yields, as markets anticipate rate cuts. This steepening trend, which began in earnest in late June, is significant because it reflects a growing belief that the most acute phase of the economic slowdown, and the associated recession risk, may be over. Take the US 2-year and 10-year yield curve which has been inverted.

Traditionally, an inverted yield curve signals a looming recession, but the recent return to a more normal curve suggests that the period of waiting for a slowdown and/or recession may have passed, and markets are now pricing in the economic consequences of monetary easing. Historically, during periods of bull steepening, certain defensive sectors such as Healthcare, Utilities, Banks, and Staples have outperformed, as investors shift towards sectors that offer stability and reliability in times of economic uncertainty, but that hasn’t happened – suggesting a gap is forming. Looking closer to home - the typical sectoral performance associated with yield curve steepening has only partially played out.

Just have a look at the Tech sector, it has significantly outperformed this year, a divergence from its usual underperformance during such periods. This divergence is largely due to the impressive growth execution couple that with their larger capitalisations in this cycle has made them a substitute for the quality growth traditionally offered by Healthcare. Looking forward, should the yield curve move from bull steepening to bull flattening (where the long end of the curve leads the decline), leading sectors are expected to shift.

In a bull flattening trade, sectors such as Real Estate and Materials typically emerge as leaders, creating the potential for broader equity market gains. This scenario is currently the most plausible case for broadening equity returns and driving further upside in the market index. 2. Commodities: Mind the thud While financial markets are pricing in the possibility of a soft landing, commodity markets are facing a much more severe test of the hard landing so hard it might be considered a ‘thud’.

The cost curves for key Aussie commodities, such as Iron Ore and Metallurgical Coal, are being battered by soft global demand and oversupply dynamics particularly out of China. These cost curves are being tested as commodity prices struggle to find support amid concerns over an economic slowdown. This is certainly the scenario BHP and Rio are seeing and have factored this into their forward guidance numbers.

Then we look at global commodities - oil inventories have reached levels typically associated with recessions, further signalling the market's concern over weakening demand and OPEC’s recent communiques suggesting it will halt its planned increases in output. We also have a scenario not seen in the modern era, a China story that isn’t working. China’s economic policies are under intense scrutiny, and the country’s growth trajectory will significantly impact global demand for key commodities in the coming year.

The negative price signals in the commodities space stand in sharp contrast to the more optimistic outlook being priced into equity markets. While equities suggest a soft landing is still the base case, commodities are flashing red with alarm as price weakness implying deeper demand concerns and thus issues around growth. This divergence raises the risk of a sharper reversal in positioning, particularly in resource-linked equities.

The caveat to this is the ongoing capital constraints on supply, combined with the potential easing of demand concerns as monetary policy softens, could set the stage for a recovery in certain commodity markets. If this was to play out, broad exposure to large-cap Energy stocks, particularly in Oil and Uranium, as well as to large-cap diversified Materials and Gold could be beneficial, as these sectors are well-positioned to benefit from any eventual recovery in global demand. 3. RBA’s Easing Path – When not If The Reserve Bank of Australia (RBA) continues to chart its own path.

It’s cautious approach that prioritises inflation risks has been the core principle of RBA Governor Michele Bullock. And despite mounting expectations for a faster easing cycle, the RBA has so far resisted pressure to cut rates aggressively stating that controlling inflation is far more important than short term growth concerns. Investors are divided on how quickly the RBA will move to ease policy.

While the central bank has maintained a patient stance, market expectations are pricing in a full rate cut by February. The consensus view is that the RBA will ultimately follow the lead of other central banks and cut rates sooner than currently forecast, with some expecting the easing cycle to begin well before the RBA’s projected May 2025 timeline. But whenever it starts – all are of the same view, once they start it will signal a solid period of cuts.

The consensus is that come December 2025 – the cash rate will be 3 percent not the current 4.35 per cent we have. The RBA’s decision-making will come down to the economic landing all are facing. Should a hard landing materialise, the RBA may be forced to cut rates faster to support the domestic economy.

However, if a soft landing prevails, there is every incentive for the RBA to remain behind its global peers in cutting rates. This approach (which is the current one taken by the RBA) would help support the AUD. It would also help in reducing the inflationary pressures from imported goods, while also allowing the labour market to cool and consumption to weaken, preventing a rapid reacceleration of inflation once policy is eased.

For equity markets, the RBA’s cautious easing profile suggests a prolonged period of below-trend growth. This would delay the cyclical uplift in earnings that is needed to justify current market valuations. As a result, it can explain why the ASX keeps hitting resistance at around 8100 points, there is no catalyst to push it higher.

While the easing cycle will eventually provide a tailwind for equity valuations, the current environment of slow growth and cautious monetary policy implies that significant market gains are unlikely until later in the cycle.

So FY24 earnings are now done and from what we can see the results have been on the whole slightly better than expected. The catch is the numbers that we've seen for early FY25 which suggested any momentum we had from 2024 may be gone. So here are 8 things that caught our attention from the earnings season just completed.

Resilient Economy and Earnings Performance Resilience surprises remain: The Australian economy has shown remarkable resilience despite higher inflation and overall global pessimism. The resilience was reflected in the ASX 300, which closed the reporting season with a net earnings beat of 3 percentage points - a solid beat of the Street's consensus. This beat was primarily driven by better-than-expected margins, indicating that companies are effectively managing cost pressures through flexes in wages, inventories and nonessential costs.

The small guy is falling by wayside: However, the reporting outside of the ASX 300 paints a completely different picture. Over 53 per cent of firms missed estimates, size cost efficiencies and other methods larger firms can take were unable to be matched by their smaller counterparts. The fall in the ex-ASX 300 stocks was probably missed by most as it represents a small fraction of the ASX.

But nonetheless it's important to highlight as it's likely that what was seen in FY24 in small cap stocks will probably spread up into the larger market. Season on season slowdown is gaining momentum Smaller Beats what also caught our attention is the three-percentage point beat of this earnings season is 4 percentage points less than the beat in February which saw a seven-percentage point upside. That trend has been like this now for three consecutive halves and it's probable it will continue into the first half of FY25.

The current outlook from the reporting season is a slowing cycle, reducing the likelihood of positive economic surprises and earnings upgrades. Dividend Trends Going Oprah - Dividend Surprises: Reporting season ended with dividend surprises that were more aligned with earnings surprises, with a modest DPS (Dividends Per Share) beat of 2 percentage points. This marked a significant improvement from the initial weeks of the reporting season when conservative payout strategies led to more dividend misses.

The stronger dividends toward the end of the season signal some confidence in the future outlook despite conservative guidance. However, firms that did have banked franking credits or capital in the bank from previous periods they went Oprah and handed out ‘special dividends’ like confetti. While this was met with shareholder glee, it does also suggest that firms cannot see opportunity to deploy this capital in the current conditions.

That reenforces the views from point 2. Winners and Losers - Performance Growth Stocks Outperform: Growth stocks emerged as the clear winners of the reporting season, with a net beat of 30 percentage points. This performance was driven by strong margin surprises and the best free cash flow (FCF) surprise among any group.

However, there was a slight miss on sales, which was more than offset by higher margins. Sectors like Technology and Health were key contributors to the outperformance of Growth stocks. Stand out performers were the likes of SQ2, HUB, and TPW.

Globally-exposed Cyclicals Underperform: Global Cyclicals were the most disappointing, led by falling margins and sales misses. The earnings misses were attributed to slowing global growth and the rising Australian Dollar. Despite these challenges, Global Cyclicals did follow the dividend trend surprised to the upside.

Contrarian view might be to consider Global Cyclicals with the possibility the AUD begins to fade on RBA rate cuts in 2025. Mixed Results in Other Sectors: Resources: Ended the season with an equal number of beats and misses. Margins were slightly better than expected, and there was a positive cash flow surprise for some companies.

However, the sector faced significant downgrades, with FY25 earnings now expected to fall by 3.2 per cent. Industrials: Delivered growth with a nine per cent upside in EPS increases, although slightly below expectations. Defensives drove most of this growth, insurers however such as QBE, SUN, and HLI were drags.

Banks: Banks received net upgrades for FY25 earnings due to delayed rate cuts and lower-than-expected bad debts. However, earnings are still forecasted to fall by around 3 per cent in FY25. Defensives: Had a challenging reporting season, with net misses on margins.

Several major defensive stocks missed expectations and faced downgrades for FY25, which led to negative share price reactions. Future Gazing - Guidance and Earnings Outlook Vigilant Guidance has caused downgrades: As expected, many companies used the reporting season to reset earnings expectations. About 40 per cent in fact provided forecasts below consensus expectations, which in turn led to earnings downgrades for FY25 from the Street.

This cautious approach reflects the uncertainty in the economic environment and the potential for slower growth ahead, which was reflected in the FY24 numbers. Flat Earnings Forecast for FY25: The initial expectation of approximately 10 per cent earnings growth for FY25 has completely evaporated to just 0.1 per cent growth (yes, you read that correctly). This revision includes adjustments for the treatment of CDIs like NEM, which reduced earnings by 2.8 percentage point, and negative revisions in response to weaker-than-expected results, guidance, and lower commodity prices.

Resources were particularly impacted, with a 7.7 percentage point downgrade, leading to a forecasted earnings decline of 2.8 percent for the sector. Gazing into FY26: Early projections for FY26 suggest a 1.3 percent decline in earnings, driven by the expected declines in Resources and Banks due to net interest margins and commodity prices. However, Industrials are currently projected to deliver a 10.4 percent EPS growth, would argue this seems optimistic given the slowing economic cycle.

The Consensus Downgrades to 2025 Earnings: The consensus for ASX 300 earnings in 2025 was downgraded by 3 per cent during the reporting season. This reflects a broad range of negative revisions, with 23 percent of stocks facing downgrades. Biggest losers were sectors like Energy, Media, Utilities, Mining, Health, and Capital Goods all saw significant consensus downgrades, with Media particularly facing downgrades as budgets are slashed in half.

Flip side Tech, Telecom, Banks, and Financial Services, saw aggregate earnings upgrades. Notably, 78 percent of the banking sector received upgrades, reflecting some resilience in this group. Cash Flow and Margin Surprises Positive Cash Flow: Operating cash flow was a positive surprise, with 2 percentage point increase for Industrial and Resource stocks reporting cash flow at least 10 per cent above expectations.

The main drivers of this cash flow surprise were lower-than-expected tax and interest costs, along with positive EBITDA margin surprises. Capex: There were slightly more companies with higher-than-expected capex, but the impact on overall Free Cash Flow (FCF) was modest. Significant positive FCF surprises were seen in companies like TLS, QAN, and BHP, while WES, CSL, and WOW had negative surprises.

Final nuts and bolts Seasonal Downgrade Patterns: The peak in downgrades typically occurs during the full-year reporting season, so the significant downgrades seen in August are not necessarily a negative signal for the market. As the year progresses, the pace of downgrades may slow, and there could be some positive guidance surprises during the 2024 AGM season. However, with a slowing economic cycle, the likelihood of positive surprises is lower compared to 2023.

Overall, the reporting season highlighted the resilience of the Australian economy and the challenges facing certain sectors. While Growth stocks outperformed, the outlook for FY25 remains cautious with flat earnings growth and sector-specific headwinds. Investors will need to navigate a mixed landscape with potential opportunities in contrarian plays like Global Cyclicals, but also be mindful of the broader economic uncertainties.

In this article, we take an in-depth look at the concept of strength of signal and its potential role in improving trading outcomes. Traders are constantly seeking ways to enhance their results consistently, and the idea of evaluating the strength of a trading signal may provide a pathway toward greater reliability and performance when applied to trading systems across multiple timeframes and instruments. By delving into this concept, we will explore not only what strength of signal means but also the key factors involved in its practical application in decision-making and trade execution.

Why Could Strength of Signal Be Important for Traders? Definition: Strength of signal refers to the degree of confidence and reliability a particular trading signal provides regarding anticipated market movements. It measures the quality and trustworthiness of a trading setup, aiming to increase the likelihood of success by filtering out weaker signals and focusing on higher-probability opportunities.

The idea of strength of signal is most commonly applied to trade entries, where traders seek to increase their chances of entering the market at an optimal point. This can lead to better overall performance by avoiding premature or low-confidence entries that could result in losing trades. However, strength of signal also holds significance in trade exits.

For instance, a strong signal at the entry point may weaken over time, indicating a lack of continuation in the trend. This change in signal strength could provide the trader with an early warning to exit the trade before a reversal occurs. At its most basic application, strength of signal may help traders decide whether to enter a trade.

However, its implications are far-reaching, influencing other critical aspects of trading such as: Position sizing: When the signal is stronger, a trader may feel more confident about increasing their position size. A weak signal, on the other hand, may prompt the trader to either reduce their position size or avoid entering the trade entirely. Accumulating positions: If a trader has already entered a trade and the strength of the signal improves, they might decide to add to the existing position.

This practice, known as scaling in, can maximize gains during favourable market conditions. Exit decisions: Weakening signal strength can serve as a warning sign to exit a position. If a trade was initially based on a strong signal but the factors driving that signal begin to diminish, it could indicate a shift in market sentiment, prompting the trader to take profits or cut losses.

Components of Strength of Signal The strength of a signal can be broken down into three broad categories: price action, trading volume, and the confluence of technical indicators. Each of these components contributes in its own way to the overall reliability of the trading signal. a. Price Action Price action is the cornerstone of technical analysis and is considered the most important component when assessing the strength of a signal.

This is because price action reflects real-time market sentiment and behaviour. Candle structure: The open, high, low, and close (OHLC) of a candlestick offers vital clues about the current battle between buyers and sellers. For example, long wicks might indicate rejection of certain price levels, while a series of bullish or bearish candles can point to the start of a trend.

Patterns and formations: Multiple candlesticks forming patterns (e.g., head and shoulders, triangles, or flags) can provide insight into potential reversals or continuations. Recognizing these patterns can significantly contribute to assessing signal strength. Timeframe comparison: Price action can vary significantly across different timeframes.

A signal that appears strong on a lower timeframe, such as a 5-minute chart, might weaken when compared to the price action on a daily or weekly chart. Evaluating the signal across multiple timeframes helps traders confirm its validity. Key levels: Price action near key levels, such as support and resistance or pivot levels, play a crucial role in signal strength.

The closer the market is to a critical level, the more likely a strong reaction will occur, either a bounce or a break, adding weight to the signal. b. Trading Volume Volume is another critical component of strength of signal, as it represents the number of shares, contracts, or lots being traded at a particular price. Volume provides insight into the level of market participation and the conviction behind price movements.

Volume confirmation: When volume increases in the direction of the price move, it signals strong market participation, adding confidence to the strength of the signal. A price movement without sufficient volume may be viewed with caution, as it could lack the momentum needed for continuation. Volume divergence: Divergence between price and volume can signal a weakening trend.

For instance, if prices are rising but volume is decreasing, it may indicate that the buying interest is waning, and the strength of the signal is diminishing. Volume spikes: Sudden spikes in volume can indicate institutional participation or a major market event. High-volume candles at key levels can often confirm the validity of a breakout or breakdown. c.

Other Indicator Confluence Technical indicators summarize historical price and volume data, and while they are lagging in nature, they are undoubtedly useful in adding an additional layer of confirmation to any signal evaluation. Commonly used indicators: Many traders rely on widely recognized indicators such as moving averages, RSI, MACD, or ATR. These indicators help identify trends, momentum, volatility, and potential reversals.

The alignment of multiple indicators—often referred to as confluence —can significantly strengthen a signal. Categories of indicators: Trend indicators: Tools such as moving averages and parabolic SAR can help traders identify the overall direction of the market. A trade that aligns with the prevailing trend is likely to have a stronger signal.

Momentum indicators: Indicators like RSI and MACD provide insight into the speed of the price movement. A weakening momentum might indicate that a trend is losing steam, reducing the signal’s strength. Volatility indicators: Tools like ATR measure the degree of price fluctuation.

Sudden changes in volatility can affect signal strength, as low volatility periods may precede explosive movements. Mean reversion indicators: Bollinger Bands and similar indicators help traders identify overbought or oversold conditions. Trades taken at the extremes of these indicators can have stronger signals if supported by price action and volume.

The Role of News and Events as an influence on strength of signal evaluation Event risk is a crucial, yet often underestimated, component of signal strength. No matter how strong a technical signal appears, the release of major economic data or geopolitical news can drastically alter market conditions, leading to unexpected price movements. It’s essential for traders to remain aware of scheduled news events, such as central bank meetings or earnings reports, which can cause sudden volatility.

A strong technical signal might be overridden by fundamental factors, so incorporating event risk into the overall assessment of signal strength is a necessary practice. The Case for Weighting and a Strength of Signal Score To make the assessment of signal strength more objective, traders can develop a weighted scoring system. By assigning a value to each component (price action, volume, indicators, etc.), they can generate a Strength of Signal (SOS) score.

This score provides a quantitative measure to guide trading decisions. Weighting components: Not all factors carry equal importance. For instance, price action may be assigned a higher weight than indicator confluence, as it reflects current sentiment.

A possible weighting system could look like this: Sentiment change: 40% Candle structure: 20% Higher timeframe confirmation: 10% Volume: 10% Proximity to key levels: 10% Momentum: 5% Volatility change: 5% Instrument and timeframe differentiation: Different instruments and timeframes may require tailored weighting. For example, the weighting system for a fast-moving 30-minute gold chart might differ significantly from that of a more stable 4-hour AUD/NZD chart. Using a Score to Drive Trading Decisions Once a strength of signal score is established, it can be applied to various aspects of trade management: Entry decisions: A minimum SOS score (e.g., 60) could be required for entering a trade.

This ensures that only high-quality setups are considered. Position sizing: A higher SOS score could justify increasing position size. For example, if the score is above 70, a trader might increase their position by 1.5x the normal size, while a score above 80 might warrant doubling the position.

Exit decisions: A decreasing SOS score (e.g., below 30) might signal the need to exit the trade, helping traders protect profits or minimize losses. Summary The concept of strength of signal offers a structured approach to assessing the quality of trading setups. By incorporating factors like price action, volume, and technical indicators into a weighted system, traders can make more informed decisions, potentially improving both their consistency and performance.

Experimenting with different scoring systems and analysing their impact on your trading strategy is worthwhile investigating further in the reality of your own trading. Over time, a well-developed score can provide valuable insights into when to enter, accumulate, or exit trades based on the changing dynamics of the market.

Introduction to Scaling in Trading Scaling in trading involves adjusting the size of trading positions based on specific criteria or rules. This concept is crucial for both discretionary and automated traders, with the latter group often finding it easier to implement due to the structured, rule-based nature of automated systems. For discretionary traders, scaling introduces flexibility to tailor position sizes to fit current market conditions or account balance.

Scaling strategies can apply to an entire account or to selected strategies, depending on the trader’s goals, approach, and the quality of their data. A well-planned scaling approach can enhance profit potential while managing risk, whereas an ad-hoc or uninformed scaling practice often introduces additional risks without promising substantial rewards. This article outlines critical concepts and principles in developing a robust scaling strategy, helping traders determine a path suited to their trading goals and risk tolerance.

Types of Scaling Approaches The choice of scaling approach is based on factors such as experience, trading objectives, and risk tolerance. Any structured scaling approach generally surpasses none, and selecting one today doesn’t preclude exploring others later. We’ll examine four common approaches to assist you in making an informed decision.

Fixed Lot Size Scaling Fixed Lot Size Scaling involves trading a consistent lot size for each position, regardless of changes in account balance or market conditions. This approach is straightforward and accessible, especially for beginners who might not be ready to adapt position sizes actively. However, fixed lot size scaling can be restrictive; it does not account for changes in account value or market dynamics, limiting the ability to manage risk effectively during volatile market periods.

Example in Automated Trading Fixed lot size scaling is especially useful when transitioning a model from backtesting to live trading. For example, if an Expert Advisor (EA) performed well during backtesting with a fixed lot size of 0.1, starting live trading at this minimum volume is prudent. Doing so allows traders to verify live performance against backtest expectations, ensuring the EA’s effectiveness in real market conditions before considering scaling up.

Fixed Fractional Scaling Fixed Fractional Scaling trades a set percentage of the account balance, automatically adjusting position sizes with account growth or shrinkage. This inherently responsive approach aligns with the account’s performance. For example, a trader may risk 1% of the account per trade in leveraged trading, calculating this amount based on the potential loss if a stop-loss is triggered.

This risk tolerance can vary depending on the individual’s strategy and objectives. Benefits and Considerations This approach helps manage risk, especially as the account size fluctuates. However, the varying lot sizes across different instruments and exposures require close monitoring.

For example, in a portfolio with both Forex and commodity trades, the risks associated with each asset type might differ. Traders must consider this variability to ensure their risk exposure remains consistent. Selective Strategy Scaling Selective Strategy Scaling increases position sizes based on the proven success of specific strategies or components within strategies.

This approach accelerates gains, but reaching a critical mass of trades to evaluate performance becomes more challenging due to its selective nature. Example of Strategy-Specific Scaling Consider a trader using multiple strategies: one focusing on trend-following and another on range-bound markets. If the trend-following strategy demonstrates a high win rate and favourable profit factor over time, the trader may selectively scale this strategy’s position sizes.

Meanwhile, the range-bound strategy could be scaled conservatively until it shows consistent performance. Selective scaling like this allows traders to leverage their most reliable strategies for greater potential returns. Variable Scaling (Advanced) Variable Scaling is a sophisticated approach adjusting trade sizes based on market conditions, including price action, trends, signal strength, and volatility.

Advanced traders using variable scaling develop a system to dynamically adjust position sizes based on indicators, providing flexibility to respond to market changes. Example Using Volatility Suppose a trader monitors market volatility through the Average True Range (ATR) indicator. In periods of low ATR (indicating low volatility), the trader might scale down positions to reduce risk.

Conversely, during high volatility, they might increase position sizes to capitalize on larger price swings. This approach requires a deep understanding of technical analysis and specific criteria for guiding scaling decisions. Broad Principles for Effective Scaling Effective scaling relies on well-defined criteria aligned with account size, risk tolerance, and trading performance.

Key metrics include account balance, margin usage, and trade success metrics. Incremental scaling allows traders to gradually adjust position size, thus managing risk as trading volume increases. A structured scaling plan ensures scaling decisions align with the trader’s goals and risk management rules, avoiding emotional, unplanned adjustments.

Optimal Conditions for Scaling (“The When”) Scaling should be guided by specific performance metrics that assess result reliability. Key indicators include: Win Rate: Consistency in win rate over time is crucial. A stable win rate suggests that the strategy performs well across various market conditions.

Profit Factor: A ratio of gross profit to gross loss. Generally, a profit factor above 1.5 indicates more profitable trades than losses. Drawdown: The peak-to-trough decline in account balance.

Lower drawdown suggests more stability, supporting the case for scaling. When combined with net profit and worked out as a ratio, with automated trading we would expect a Net profit to drawdown ration of at least 8:1 Risk-Reward Ratio: A higher ratio shows that profit potential outweighs losses, making the strategy more viable for scaling. Sharpe Ratio: This risk-adjusted return measure indicates better performance relative to risk.

For instance, if a trader maintains a high win rate, profit factor, and low drawdown, they might consider scaling up. However, if metrics vary significantly, scaling should be approached cautiously. Determining How to Scale The degree to which you scale is a crucial component of your plan.

Scaling is often done incrementally, such as moving from a starting lot size of 0.1 to 0.3, 0.5, and so on, based on the strength of results. For instance, a trader may scale up by 0.1 lot for each 5% account growth, provided performance metrics remain stable. It’s essential to clearly define this scaling plan before implementation, follow it precisely, and review it over time to ensure it meets trading objectives.

Psychology and Challenges of Scaling Scaling involves a psychological shift, as traders manage larger positions with increased potential profit and loss. Traders often encounter procrastination, impatience, or anxiety, especially when adjusting to larger numbers. Managing Psychological Challenges To illustrate this principle in an example, if a trader accustomed to $100 maximum profits scales to a position where potential profits reach $400, the temptation to close trades early may be overwhelming.

To ease this transition, a trader might simulate the larger trades in a “ghost account,” which mirrors live trading without risking real capital. This simulation allows the trader to become comfortable with the numbers, building confidence without financial exposure. Creating and Committing to a Scaling Plan An effective scaling plan is data-driven, with metrics and thresholds to guide scaling actions.

Regular reviews ensure the plan adapts to evolving market conditions and performance outcomes. Like all elements of a trading system, a scaling plan requires discipline, objectivity, and data-driven actions rather than emotional reactions. Summary Scaling is an advanced trading concept that, when applied correctly, can optimize profit potential while managing risk.

This guide outlined various scaling approaches—Fixed Lot Size, Fixed Fractional, Selective Strategy, and Variable Scaling—each with distinct applications depending on the trader’s experience, strategy, and market conditions. Fixed lot size scaling offers simplicity and is suitable for beginners or automated trading, while fixed fractional scaling aligns well with account growth or decline. Selective strategy scaling focuses on increasing successful strategies' position sizes, while variable scaling dynamically adjusts to market conditions, requiring deep technical knowledge.

The guide also emphasized key performance metrics for effective scaling and highlighted the psychological challenges involved, with strategies for managing emotional responses. Ultimately, a successful scaling plan is disciplined, data-driven, and regularly reviewed to ensure alignment with trading objectives. Traders who develop and commit to a structured scaling approach can enhance their trading results by making informed, calculated adjustments to position sizes based on performance metrics and risk tolerance.

Australia's second quarter CPI due out on the 31st of July could go one of two ways so let's dive into how it will move and how to trade it. First way - Coming in line or below Currently 24 of the 30 surveyed economists see inflation coming in line or below expectations. That is June quarter CPI coming in at 1% quarter on quarter and 3.8% year on year.

Trimmed mean expected to come in at 0.9 of 1% quarter on quarter and 4% year on year remembering this is the preferred measure of the RBA. If this is indeed the case it would mean a step down from the March quarter read which was 1% and would hold year on year inflation at 4%. We need to highlight the RBA own forecast as well, because at the last Statement of Monetary Policy update the forecasted head inflation was the same as the consensus 3.8% year on year.

But trimmed mean inflation is 0.2% lower at 3.8% year on year. This will be interesting because the Hawks out there believe anything that is 3.9 or above will be a trigger for the RBA next Tuesday. The variance can be put down to several things how the trimming is actually done but what really matters to us as traders is the impact of dwelling and rents on the inflation figure which has been a key factor for inflation overshooting over the last two years.

If we have a look at rent, expectation is for a 1.9% June quarter rise down from 2.1% in the March quarter. So trending in the right direction but still well above a comfortable and sustainable level. Rent’s overall contribution to the full figure at this point is 0.12 compared to house purchases which is only 0.08 the expectation for the June quarter is 1% the house purchases have 1.9% for utilities.

This gives a combined figure of 1.35% for the June quarter in housing. It is the number one thing to watch on Wednesday. Health is the other part of the inflation data to watch.

We've not got any major updates in the monthly CPI data about health and the expectation is for the June quarter to see a 2.5% increase in health inflation. This is the other part of the data that will matter. We highlight all this to give you as much information as possible to make informed decisions at the 11:30 Australian Eastern Standard Time drop.

Because if the data does come in at these levels it will probably be enough to confirm the RBA will hold at their August 6 meeting. And in line or below figure is likely met with dovish views and bearish trading. More on that below.

Second way: Above expectations What's so interesting about Wednesday's CPI is that for the last 6 consecutive quarterly updates Australia CPI has not just come in above consensus it has been above the full range of views. It's why its giving us reason to pause and to suggest that there is every chance based on the data from the monthly inflation figures the upside surprise is a very real possibility. Retail spending although sluggish has remained above expectations, services have seen reasonable price increases during the April to June.

As things like insurance, telecommunications and utilities increase prices well and truly above the inflation rate. Education already expected to be strong has also seen wage increases during this quarter along with higher infrastructure spending from state governments. Housing which is already forecasted to be strong has surprised to the upside in every one of those six previous readings and according to Core Logic and Prop Track data of the April to June figures suggests that it could be a seventh time in a row housing comes in above expectations.

The final unknown is the energy rebates. It's been so surprising just how long injury baits have been able to hold down electricity prices in the CPI. Several forecasts now show the snapback from these rebates is on.

If this transpires, the expectation is for energy to snap 7.2% higher in the June quarter. Now the caveat here is that already the federal government has put a new $300 per household energy rebate policy in place so maybe this will be ignored. But there's no getting away from the fact energy is the big unknown and one that could blow the CPI data well above expectations.

This is likely to see bullish bets being made on the August 6 RBA meeting and strong positioning in the Aussie dollar. We think at the moment this outcome is being discounted by the market and by the economic world. Because the question that needs to be asked can the RBA justify inflation now running above its own target for three years in a row?

We would argue it probably can't. What trade First and foremost, we need to warn against looking at AUDJPY and AUDUSD. The reason for this, do not forget pretty much at the same time as Australia’s CPI is being released the Bank of Japan is forecasted, for the first time in decades, to release it artificially depressed interest rates.

We know that the BoJ has been defending the JPY over the past month and having seen the AUDJPY get to as high as ¥109.5 in early July the cross now sits at parity. If the BoJ does do as forecasted the cross could do anything on Wednesday. Then there is the unknown about how traders will position with all the machinations the BoJ action and the CPI data means – realistically the cross could experience some mass volatility.

The other is that it is the beginning of the US Federal Reserve’s July meeting and although there is no expectation that they will cut rates on Thursday, it is unknown what would be said during chairperson Powell’s press conference. FX safety trade has been pretty solid over the last period and money has flowed back to the USD. We are unsure about what could happen over the 48 hours between the CPI and when the Fed reports for that reason, we think the USD is probably not the one to look at for this particular piece of data trade.

Thus crosses such as EURAUD, AUDNZD and even AUDCAD are probably better options if you are going to trade pre and post the CPI data as there is no major impact on the other side of the cross from fundamentals in the next 72 hour period. If you are looking to the August 6 RBA meeting you can look at AUDUSD and AUDJPY but with entry points late on Thursday or Friday when there will be a greater understanding about what the Bank of Japan and the US Federal Reserve have done and will do in the future. Happy trading