Lessons from the Pros

Featured Article

Financial News and Trading Forex

When we are speculating in today’s markets it’s easy to think that keeping a close eye on financial news, studying economic data and paying attention to fundamental analysis is vital to success. After all, why wouldn’t we want to make sure that we were aware of anything that could affect the price of our investments? However, after a little time in the Forex markets we soon learn that often the financial news reports don’t lineup with the price action, leaving us with frustration and confusion.

It is commonly believed that because all Forex traders get financial news at the same time, this makes it somehow a more level playing field, but this is not the case. Let’s be sensible for a moment and ask ourselves the question: do the major banks and institutions make the same decisions as we do with the same information? It is hard to imagine that a major investment bank uses the same technology as retail traders, isn’t it?

Free Trading WorkshopIn fact, it is more likely that they have access to superfast news terminals allowing them to pull the trigger on a trading opportunity way ahead of the rest of us. Inevitably, this leaves retail FX traders trailing behind the big boys and scratching their heads in frustration. This is one of the many reasons why I ignore the financial news and trade the price action in front of me.

If you have read previous articles by myself or my colleagues, you will know that Online Trading Academy chooses to focus our analysis on price and the patterns that the biggest banks and institutions create when they buy and sell. We call this our core strategy, which recognizes the footprints of institutional demand and supply and, in turn, gives us reasons to buy and sell using a rules-based process. If you take the time to develop an unemotional approach to speculating in the global currency markets, you will find that your trust in that system will grow and, at the same time, your need to follow and attempt to understand the financial news will fade.

A great example of this can be found in a live trading session I was holding with a group of our students on May 1. This was an important day on the economic calendar because the federal funds for interest rates was being published at 2 PM Eastern Standard Time.

List of financial news announcements and highlighting the federal funds rate.

While many analysts were expecting the Federal reserve to hold interest rates at 2.5%, it is not uncommon on a major piece of news like this to see the dollar and other currencies react in a volatile fashion. These instances often cause problems for uneducated FX traders but, on the flip side, they also create wonderful trading opportunities for those with a solid trading plan.

Around three hours before the statement, we set up two low risk high reward trading opportunities. One was on the EURUSD with a short at an institutional supply zone, and the other was also a shorting opportunity at a supply zone on the GBPUSD pairing. Look at the screenshots below of the live trading room in real time when we set these trades up:

Chart showing a Forex trade as it was placed.

Ironically, to the untrained eye both markets were in uptrends at the time which suggested prices were going to go higher. However, our strategy suggested the opposite, with major institutional selling leaving a major footprint at the predetermined supply zones. This is where we placed our orders to sell the pair with a tight stop loss just above the zone in case we were wrong, and a profit target farther down for a generous risk to reward ratio if hit.

The beauty of set ups like these, is that they can be set up ahead of time with all the components of the stop, entry and target placed in the system. This allows us to remove emotion and let the plan fold out either way. Here are the results as they happened:

At the time of writing, the GBP trade has taken partial profits and we are looking for a final target lower, with only profit and no risk on the trade. The EUR trade had a very tight zone and produced around 10 to 1 reward to risk. Both trades worked out according to plan and without any need to understand the rate statement or why rates were held at 2.5%.

We must always realize that news is called news because it has already happened. News reports only explain what happened in the past. As traders, we need to predict what is going to happen in the future and financial news cannot do that. Learn to manage your downside risk and develop a consistent, simple rules-based approach and you will soon find that you’ll be able to focus on the one thing that matters above all, which is price itself.

Be well and take care.

Sam Evans – sevans@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.