- 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
