Trading the reaction to the news release and not the actual news release, can prove to be an efficient FX strategy

Feb 4 • Forex Trading Articles • 837 Views • Comments Off on Trading the reaction to the news release and not the actual news release, can prove to be an efficient FX strategy

FX traders eventually learn that the events listed on the economic calendar, have the power to move the FX markets. Whatever trading strategy and overall method you develop, perhaps by using some of the most popular technical indicators available, novice FX traders will quickly observe that a surprising data release (missing or beating the forecast), can move markets.

If, for example, a surprise interest rate adjustment is made by a central bank, FX markets will immediately react. It doesn’t matter if you’re trading through an STP-ECN broker, such an announcement and the immediate reaction, can cause such rapid and intense market activity, that you experience issues such as: slippage, poor fills and widening spreads. It’s not the ECN broker, who operates a no dealing desk model, who causes the market maelstrom, it’s the market, as the liquidity pool is still operating in a highly efficient organic and transparent manner. It’s during these times when individual retail traders, who are relatively new to the world of trading, can become disillusioned with the FX industry.

They may have been primed and ready to perhaps trade the latest NFP jobs data from the USA, they’ve predicted the direction of a major currency pair such as the EUR/USD correctly, but they then experience some of the trading issues previously mentioned. These experiences can unnecessarily prejudice an inexperienced trader’s views and approach to the industry, when a simple solution to avoid becoming stressed and potentially finding yourself compromised by market activity, is readily available.

If you converse with many experienced and (by proxy) successful FX traders, they may testify they avoid taking trades during the times that high impact calendar events are published. In some ways this appears to be counter intuitive, until you begin to examine their reasons for avoiding trading at such times. Experience may have taught the experienced trader that the initial reaction can prove to be counter productive to their trading strategy, even if they’ve predicted the FX market direction correctly.

Examples of how surprising announcements can move the market, can be illustrated by discussing the use of stops. During times of increased activity, haphazard liquidity might cause a currency pair to lose support in a particular direction. A security might rapidly spike in both directions and the spikes might be so significant, they take out a stop. You might be long, the market might stay long and the bullish direction might increase, but before continuing direction the FX pair might experience a sudden bearish slump, before maintaining its direction. You might find your carefully placed stop taken out and you’re left frustrated as a consequence.

Experienced traders might refer to the phrase; “don’t trade the news, trade the reaction to the news”. The suggestion is that you wait for a period of time after a scheduled calendar event, to establish the direction of the market, rather than trying to trade the immediate reaction of the news. In doing so you might avoid the issues of: slippage, poor fills and spikes, as the market attempts to find direction, whilst liquidity is rapidly changing. Such an approach requires calm self discipline and emotional control. It’s worth walking through a scenario as an example, of how the process could work.

Let’s surmise that the FOMC/Fed is scheduled to announce their latest interest rate decision, underpinned by the narrative outlining their monetary policy. In a surprising move the FOMC reveals a rise by 0.25% when the overwhelming forecast was for a hold. The FX markets for USD pairs gyrate wildly, especially EUR/USD. The security experiences a double spike; downwards and upwards, whilst price rapidly oscillates, in a wide range, with a bullish bias. This process takes place within a two minute period, after the release is published.

Rather than become embroiled in the frenetic activity, you stay out of the market until the market for EUR/USD eventually finds direction. You could prefer to trade off the ten minute chart, and wait until the first candle has formed after the announcement. You’re then satisfied that the solid bullish candle is proof of the bullish direction. You enter long, with your stop placed at the daily low.

The aforementioned example is just one method by which traders could avoid the times when market activity can be at its highest, as it generates false signals, leading to elevated stress and bad trading decisions. Losses should be avoided wherever and whenever possible. In adopting such a patient strategy, FX traders are ensuring they’re analysing the market correctly and entering at the most opportune time, whilst protecting their accounts from unnecessary risk taking.

 

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