The topic of this week’s article is a direct response to a number of questions and emails I have had since the explosive moves on the EURUSD which occurred on December 3rd. I thought this would be a great opportunity to highlight how to overcome some of the common challenges we are faced with in our trading when it comes to major economic news.
As you may already know, most forms of FX education will tell you to use trading news to your advantage when trading currency, simply because we all get the news at the same time which, in turn, is supposed to level the playing field. In my experience however, I have found this to be the opposite, making me more confused than if I were to ignore the economic data altogether. You see, when a news piece comes out and there is a reaction, you are basically forced to jump in as you see the price start to move or sit on your hands and watch things develop without you. Typically, both actions result in frustration due to the fact that when you jump in you are basically gambling on price continuing to move after it has already moved a lot (very low probability), or when you wait it out you are then likely to read the news after the event explaining why the move happened, which is obviously of no use to us whatsoever in hindsight. Mostly people are left scratching their heads wondering how they could have interpreted the news better or done things differently.
I have found it far more effective to ignore all the news and data completely and trade based on the most important thing of all, namely the price itself. All I care about is what the major banks and institutions are doing when they trade and are trying to enter positions. By using an understanding of how unfilled orders create levels of supply and demand, there is no reason why anyone can’t simply buy and sell where the banks are doing so. The trick is to remain patient, follow the rules and be objective.
Going back to the move on December 3rd on the EURUSD, we saw a rally of around 400 pips in 1 day on the pair, with major news sources saying it was due to Draghi not delivering the stimulus packages that the markets had expected and his cutting of the deposit rate as well. Well that’s a great reason to explain the move, but how could we have taken advantage of the move before it actually happened and with plenty of time to plan?
Let’s take a look at an XLT I held the week before on November 24th:
As the Live trading session began I shared the key levels I was hoping to see turns from in the EURUSD. Note the 240 min supply at 1.0687-1.0707 and the Demand at 1.0585-1.0495. These were the areas that we were expecting a drop from right away and a rally from in the next week or so. The levels looked like this as I shared them with the class in real time:
The top right chart shows a nice short-term income trade at supply which was to play out over the next day or two. The chart in the top left is the longer-term wealth demand level where we were expecting prices to rally from for a bigger move and also provided an ideal final target for our short trade setup if it triggered. Clearly the banks were keen to buy and sell at these areas as the moves away suggested major imbalances between supply and demand, making us want to enter if prices returned to the said levels. The short trade triggered later that day and hit the lower zone for a quality risk to reward outcome as we can see here:
Now, obviously we were aware that the ECB press conference was looming but as long as you have planned your trades and risk in advance and know why you are entering a position in the first place, I say just play the level and see how it turns out. The worst case is that you get a small loss, after all. Let’s see how the lower level of demand played out in the end:
The actual trade triggered a few days before the ECB press conference, but as we can see it produced the goods with a fantastic rally. None of this analysis was based on news or expectations of what was to be said by Mario Draghi. It was simply based on an understanding of the footprints of the institutions and how they handle their trades. I have never been one to try and interpret trading news and fundamentals as I find it confuses me more than helps me. This approach simply allows me to know what to do and when to do it regardless, all the while controlling my risk and reward and allowing me to not be a slave to my screen. If you find yourself confused by the news, then why not just stop looking at it?
Wishing you all a very Happy Christmas!
Sam Evans – firstname.lastname@example.org