It seems to be that in the world of Forex trading there are some weeks where we seem to get more volatility around economic news than other times. I have never done any analysis into this as it does not really matter when you trade price charts alone as your primary decision making tool. However, as we know, there are many hundreds of currency traders out there who are eager to try and make the most of these news-based moves, whether it is safe to do so or not. Sure it can be very tempting to try and jump on board a major move in the markets when a news item is released, but more often than not the result is not the best as we watch ourselves get faked out in a false move or, worse still, chopped around with too many entries resulting in a high number of unpleasant losses. So what is the fix with all this news coming out on a daily basis? Well, let’s take a deeper look into it.
If you want to trade around major news releases do yourself a favor, take these simple pieces of advice I can share with you. Firstly, don’t worry about the actual numbers as they will not tell you what direction the market is likely to go (how many times have you seen good news create drops in price and vice-versa?). Secondly, know the trades you are willing to take before the actual news report is released. That’s right, I am saying that you should have already mapped out where you want to enter and exit your trades before the news comes out. Then again, this is something you should do before any trade but it is surprising just how many traders seem to overlook this level of planning.
Let’s take a look at some recent examples of news and the price action which followed on the GBPUSD. Take the chart example below which shows the prices as they were leading up to the release of the Consumer Price Index or Inflation figures:
As we can see, the prices had already been rallying and were stalling in a quality supply zone to the left which had created a major imbalance in price a few weeks before. We know that all of the willing orders to sell were not filled by the buyers the last time prices were at that level, resulting in the strong drop away. Knowing this, we can objectively assume that using a tight stop, prices may fall from the current level again. When the news did come out, inflation was reported to have dropped in the UK, fundamentally weakening the GBP and resulting in a selloff to our pre-determined level of demand below:
The interesting thing here though, is that price had already begun to respect the supply zone before the actual news came out. Once the release came out, it then continued to drop to the opposing level of demand right in time for the next piece of news which was average earnings, claimant counts and unemployment rates the very next day. The figures themselves told a mixed story, with earnings dropping a little along with the unemployment rates but the number of claimants increased. No wonder people get confused with such a mixed set of results. The question the news-based trader now asks is what direction to play the market? On the other hand, a student of Online Trading Academy would instead notice the imbalance caused by the demand level from the unfilled buy orders and be happy to be a buyer of the GBPUSD, simply because that is the objective trading signal based on the price alone. This is how things worked out:
Now, based on the chart itself it is not really too surprising to witness this rally following the news. If, however, you were completely unaware of the impact of levels of institutional supply and demand upon market prices you may have been left scratching your head for answers and turning back to the news sites for an explanation of why the actual move happened. Those news sites are always happy to give out the answers but only after the prices have actually moved, thus giving no real edge in the markets if we try to use their lagging information. Now of course, a supply or demand zone is not guaranteed to work every time either but it does show us exactly where we should be buying based on the most important aspects of trading, price. Using a zone will always give us an edge to buy low and sell high with the lowest risk and the largest potential profit as well. This is fundamental to profitable trading in the long term along with a detailed trade plan and strict rules for money management and risk control. As my mentor once said to me in the early days of my education, “Remember that economic news just speeds up the process of the market doing what it was going to do all along.” Wise words of advice indeed.
Until next time take care,
Sam Evans – firstname.lastname@example.org