• What Moves the Market
  • To Trade or Not to Trade
  • Proactive Trading
  • Reactive Trading

What Moves the Market

  • It is with no doubt that news and economic data releases moves the market
  • This applies to the Forex market because changes in the economic situation directly affect the demand and supply for the currency
  • News releases provide fresh information on the performance of an economy and data surprises can sharply affect the market
  • One of the most popular ways to trade forex is to trade economic data and news releases
  • Although trading the news can be exciting, it is also very risky due to the volatility that can be triggered by the news releases

 

Key Economic Releases

Economic Data Importance

  • Depending on the current state of the economy, the relative importance of these releases may change
  • For example, unemployment may be more important this month than trade or interest rate decisions
  • It is important to stay on top of what the market is focusing on at the moment

To Trade or Not to Trade

  • Traders are divided into two opposing groups whenever the question of trading during news releases comes up
  • The first group believe that the news releases will affect the markets in unexpected ways, so they will avoid trading around news releases
  • The second group believe that their analysis of the past market data discounts the upcoming changes, so there is no reason to stop trading
  • Whether you should continue trading through the news releases or not, depends upon how these events affect your trading system
  • If your trading system is based upon something that the news can affect, such as the range of the most recent candle, then perhaps it might be wise not to trade
  • If your trading system is based upon something more insulated from the news, such as a price pattern that involves several candles, you may be able to trade

 

Proactive Vs Reactive Trading

  • Economic releases can be traded either proactively or reactively
  • Trading proactively involves taking a guess on whether the data will  positively or negatively affect the market and trade accordingly
  • Trading reactively involves placing a trade after the economic data is released based on the real outcome

Trading Proactively

  • Forecasting the upcoming data release results is not as difficult as it may seem
  • To forecast Employment data, one should look at the employment subcomponent of the PMI report
  • To forecast Retail Sales data, one should look at the confidence and sales subcomponents of the PMI report
  • To forecast CPI data, one should look at the PPI report which measures inflation on a wholesale level
  • Forecasting economic data is not easy but a Masters in Economics is not needed either – just some common sense

Trading Reactively

  • Reactive trading rules out any form of prediction or anticipation
  • The reactive approach calls for a quick reaction from the trader as soon as prices starts to move
  • To beat the crowd, reactive traders put their utmost focus on the correct timing through applying one of many strategies

Reactive Trading - Hedging

  • With the hedging strategy, traders would position themselves on both sides of the market
  • This strategy consists of going both long and short at the same level before the release of the data
  • Once the number comes out, the trader must close the hedged position by taking both a profit and a loss
  • Favourable data
    • First take profit on long position, wait for a correction, and then close the short position with a smaller loss
  • Unfavourable data
    • First take profit on short position, wait for a correction, and then close the long position with a smaller loss

Reactive Trading - Straddle

  •  A variation of the “hedging” technique is the “straddle” technique and it requires using pending orders
  • The trader should find the trading range on an intraday chart and place a buy pending order above the range and a sell pending order below the range
  • Buy order should have a stop loss below the range
  • Sell order should have a stop loss above the range 
  • As soon as one of the pending orders is triggered, the trader should instantly cancel the opposing order
  • The stop loss order should be a 20 pips trailing stop loss allowing an automatic trail to breakeven when the position goes 20 pips in profit

 

Reactive Trading - Post Hoc

  • Once the market has absorbed the news outcome, it usually glides in one preferred direction
  • The trader should wait 10 to 20 minutes after the release and then take action
  • The initial directional price wave is often followed by a retracement as a result of some profit taking
  • After a reversal candle, the trader should open the new position and place the stop loss below the retracement
  • This method does not put the trader to an emotional drain and provides a better risk to reward ratio

 

Reactive Trading - Post Hoc

  • Once the market has absorbed the news outcome, it usually glides in one preferred direction
  • The trader should wait 10 to 20 minutes after the release and then take action
  • The initial directional price wave is often followed by a retracement as a result of some profit taking
  • After a reversal candle, the trader should open the new position and place the stop loss below the retracement
  • This method does not put the trader to an emotional drain and provides a better risk to reward ratio

News Trading - Advantages

  • Almost every week there are key markets moving events that offer potential trading opportunities for traders
  • Many websites offer free economic calendars that can be filtered based on the currency and the importance of the event
  • News trading allows the trader to capture volatile price movements in a short period of time
  • News can act as a catalyst for prices, trends may be in pause mode and then news comes out and propels prices 
  • It does not require a lot of screen time, 5 minutes before the news release and 30 minutes to an hour after it

News Trading - Disadvantages

  • Extensive market uncertainty around news events promotes the spreads to widen significantly
  • Extreme volatility during these events can sometimes cause significant price slippages and gaps
  • Stop-loss hunting is a common phenomenon associated with news events
  • Sometimes news will bring just volatility and no distinct direction
  • Profitable as it may be, trading the news isn’t as easy as you may
  • Think – It will take loads of practice