|
It's a Mad, Mad, Mad, Mad Forex World
In a market that is driven by news such as the Forex, it's important to stay on top of current events. Thursday was a wild, wild day in the currency markets, featuring the simultaneous release of two hugely important market moving events - the monthly non-farm payroll report, and a speech by the head of the European Central Bank (ECB), Mr. Jean Claude Trichet. Although the U.S. Non Farm Payroll report was slightly worse than expected, the U.S. Dollar roared higher. This happened despite the reported loss of 62,000 U.S. jobs during the month of June, slightly worse than the expected loss of 60,000. To make matters worse, the May Non Farm Payroll number was simultaneously revised lower, from -49,000 to -62,000, and the U.S. Unemployment Rate rose to 5.5% - again, slightly worse than the expected result of 5.4%. You would think that with all of this mildly negative (as compared to expectations) U.S. economic news, the greenback would be mildly weaker, and at first glance you'd be right. I'm sure some traders saw this news and quickly hit the sell button to short the U.S. Dollar. Traders who were unaware of the Trichet speech must have been shocked to see the buck rocketing higher vs. the Euro.
Meanwhile, just 45 minutes earlier, Trichet and the ECB had raised interest rates to 4.25%. The markets greeted this event with a yawn and a shrug, because Trichet had clearly indicated that European rates would be going higher several weeks earlier. At the time, on June 5th, those comments were considered stunning, but by July 3rd Trichet's words were "priced in" to the market. Since the rate hike came as no surprise, the market did not react to it, and instead traders waited for guidance from Trichet. As is his custom, the text of Trichet's speech was released on newswires 45 minutes after the ECB's decision – in other words, at the exact same moment as the U.S. Employment Report, which came out a day early due to the fact that Friday was Independence Day, one of the most important U.S. holidays. If not for this fact, the two events would not have occurred simultaneously. The coincidental release of the two news stories created an avalanche of volatility, as we'll see.
Here's what surprised the markets – Trichet's speech gave no hint of further ECB interest rate hikes. Traders were expecting some hawkish commentary – something to let them know that Trichet would continue to raise rates as needed – and they were disappointed. There was no mention of the word "vigilance", which is Trichet's code word to indicate future rate hikes. When it became apparent that traders were not going to get any indication of further tightening of monetary policy, the Euro plunged vs. the U.S. Dollar, and the EUR/USD currency pair fell about 100 pips in less than 10 minutes. The move is shown here on the five minute chart, and the time of day is Greenwich Mean Time (GMT), which is used by Forex traders around the world as a common reference point (see figure 1).
Figure 1: EUR/USD falls hard in response to Trichet's comments. Source: Saxo Bank
Now after that brief initial plunge, many traders jumped into long positions near 1.5800. And who could blame them? After all, 1.5800 had acted as resistance for much of the past two months, so it would be reasonable to assume that the same area might act as support on the way back down. One major bank analyst incorrectly identified the pattern below as a double bottom; double bottoms form in down trends, and EUR/USD has been trending higher for the past several years (see figure 2).
Figure 2: EUR/USD daily chart shows resistance at 1.5800. Source Saxo Bank
Of course, even if the formation in question were a double bottom, that doesn't guarantee that support will hold. It didn't, and the 1.5800 support level broke badly, crashing all the way down to 1.5700. This could be partly attributed to the fact that so many traders had already closed up shop ahead of the big July 4th weekend, creating a "thinner" market (see figure 3).
Figure 3: EUR/USD breaks 1.5800 as the reaction to Trichet continues. Source: Saxo Bank
A glance back at the five minute chart shows a mild bounce at 1.5800 before breaking the figure and diving lower. The lone green candle that formed on the five minute chart was a sign of hope that the 1.5800 level would hold. As you can see, those hopes were quickly dashed (see figure 4).
Figure 4: EUR/USD mounts a brief rally at 1.5800 before dipping lower. Source: Saxo Bank
I know that some people will look at these charts and think about how much they could have made, but the fact is that when the markets are roiled in this manner, most traders lose money - and some lose a great deal of money, since this is one of the very few times in Forex trading when stops are unreliable. I heard numerous reports of prices blowing through stops on Thursday – something that happens to stock and futures traders on a regular basis, but is a rarity in the spot Forex market. One of the reasons why I switched from trading stocks to Forex was the relative dependability of fills that currency traders enjoy. However, when there is an avalanche of major news hitting the market at once, all bets are off. Smart traders close out their short term trades when situations like this occur; the only positions left open should be long-term trades with wide stops and exits.
This is not a game folks, this is a dangerous event and if you can't depend on your stop, you could lose so much money so quickly it'll make your head spin. As I mentioned earlier, many will look at the chart and see opportunity instead of danger. Skilled marketers know this and build their marketing programs accordingly. So, you may see unscrupulous operators offering to teach you how to trade during dangerous, high-volatility events such as Thursday's U.S. employment report. Please understand that while a professional marketer might want to use this as a gimmick to sell you a product, a professional trader would never suggest that you take positions either just prior to or immediately after such an event. One of the reasons for the increase in volatility at these times is because the smart traders stay out of the market, due to their understanding of the risks involved. Pros know this and would never tell you to trade during the employment report. This says one of two things about the Forex marketer/ instructors who suggest that you should trade during this event; either they don't understand the situation, which means they are unqualified to teach you anything about trading, or they do understand the situation, which is even worse. Such is the sad state of trading education in 2008, so be very careful when choosing your education provider. Apparently, there are more marketers than real traders out there, so watch out.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
|
|
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through