How long can a high impact news event effect the forex markets and how should we prepare?

Nov 23 • Forex Trading Articles • 3493 Views • Comments Off on How long can a high impact news event effect the forex markets and how should we prepare?

Occasionally there’s weeks listed in the economic calendar, which deliver high impact news events in rapid succession. We may get: an interest rate decision, a GDP reading, a jobs report, and PMIs etc. all delivered within days of each other. And if they all relate to the economy of a particular country, then the impact on a domestic currency can be substantial. Similarly, this impact can initiate a change in a currency, or various currency pairs’ behaviour; we could witness a swing, or an acceleration/continuation of the current trend, over the medium or longer term.

Unfortunately there’s no metric to judge, for example; how long the impact a rate rise of 0.5% announced by the USA FOMC, may have on the value of the U.S. dollar, versus its peers. The announcement could signal a chain reaction causing the USD to rise for weeks or months, until contrary information causes a pullback, or until price of a certain USD pair reaches a technical point, at which many orders; stops, limit and entry are clustered.

Many day traders will attempt to trade the news as it’s released and will obsess over gaining the maximum pip gains from a release, trying to judge the precise moment when the impact has begun to fade. This particular technique is extremely difficult, if not impossible to administer as without a doubt; shortly after a high impact news event moves a market, the pairs we’re trading will experience a pullback. This reversion could be for a variety of reasons, for example; as a consequence of market participants taking a collective breath before deciding where to push price next, or that the momentum is already beginning to tire, or that the market has been temporarily overbought, or oversold.

“The secret of my success is that I always sold too early” is a phrase associated with many successful traders. Whether we’re buying the market/going long, or selling/going short, there’s nothing inherently wrong with leaving lost profit on the table and in the market. Rather than attempting to apply some science to the procedure, if we’re going to trade the impact of news as it’s released, then we either have to trade manually and freehand, or place take profit limit and stop orders into the marketplace through our platform and be satisfied that we’ve profited from the news event, rather than impossibly attempting to gain every potential pip of profit.

Preparing for such an event shouldn’t represent an issue. Let’s consider a potential situation and scenario; the U.K. Bank of England is due to announce its decision regarding interest rates on a particular Thursday in the month. Analysts and economists polled by the major news agencies Reuters and Bloomberg, are predicting a rate rise. Our challenge, if we’re deciding not to trade the event manually, is where to place our stop and our take profit limit order.

If we’re convinced that the base rate will be raised, then it’s a natural assumption that the market for GBP will rise. Therefore shortly before the announcement we could decide to place our stop just below the daily low. We could then make a judgment as to where price may be headed, if a rate rise is announced. This procedure is far more difficult to predict, however, we could calculate a reasonable take profit limit order based on probability and historical movements; what would represent a large move on the day for the currency pair, 0.3%, 0.5%, or 1%? Perhaps we could apply our take profit order to such percentages and if they relate to standard pivot point levels, then we may be on the right pathway.

 

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By accident, design, or due to one of the trading anomalies evident in the market which has tens of millions of participants and a daily turnover of circa $4 trillion+, a 1% move of a currency pair (on any given day), is considered to be a highly unusual event. Generally, such a level is approximately marked by either R3 or S3, the third level of support and third level of resistance, when we draw up pivot points. Therefore, if price breaches R3 the market must be considered extremely bullish on the day for that currency pair. If R1 is bullish and R3 extremely bullish, then perhaps R2 could be considered as highly bullish. Could we consider setting our profit limit at R2 and our hard stop at the daily pivot point, or at S1, in order to trade a release?

It’s important to stress that we’re not suggesting this method as a bullet proof strategy to trade a news event, our intention is to encourage traders to think as to how they should trade a high impact news event, whilst not obsessing over taking all the available pips. If we knew in advance that we’d take 0.5% of the total 1% daily market move would we be satisfied? We should be and if not we need to work on our attitude towards what represents reasonable and realistic trading ambitions.

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