Using and improving your high impact news and fundamental policy analysis

Oct 25 • Between the lines • 1598 Views • Comments Off on Using and improving your high impact news and fundamental policy analysis

trader-analysisThere is a key phrase that has stood the test of time with regards to news trading; “don’t trade the news, trade the reaction to the news”. This week we had the perfect example of how to trade high impact news as the non-farm payroll print was published 18 days late and came in a lot lower than the economists’ polled had predicted. The result was a sharp spike in price across many of the securities affected, such as the main indices in the USA and major and cross currency dollar pairs.

The dollar was sold off and USA indices rose as investors took the view that, in light of the poor NFP data, the USA Fed would delay until 2014 any attempt at tapering off the current monetary easing of $85 billion per month. The patterns displayed on the lower time frames upon the publication of the NFP figures were reminiscent of recessionary times in the past, when the markets held their collective breath in anticipation of the print and it subsequently came in way below expectations causing huge spikes of 100 pips or more on the major currency pairs.

 

How can traders take advantage of and prepare themselves for high impact news events?

There are many calendars available highlighting the high impact news events and fundamental policy decisions that will be released over the coming week and month, traders should familiarize themselves with all the regular publishing dates.

Firstly, there’s the monthly data prints. For example, the NFP print is generally published on the last Friday of the month, and the majority of the Markit Economics PMIs are generally published in the third week of the month. Various sentiment indices are published each month, as are the base interest rates from various central banks, thereafter the banks’ will hold court via press conferences to explain their decisions and how they ‘predict’ their future in terms of forward guidance. Existing home sales are published for the USA and other countries such as the UK, Australia and New Zealand.

Whilst perhaps the biggest event, held 8 times a year (or more if deemed necessary) is the FOMC meeting. The FOMC (Federal Open Committee Meeting) holds eight regularly scheduled meetings during the year and other meetings as needed. The minutes of the regularly scheduled meetings are released three weeks after the date of the policy decision.

Then we have the weekly prints; the DOL in the USA, (the Department of Labour), publishes the unemployment claims each week. Every week reserve levels of oil and gas in the USA are published.

It’s essential that traders keep up to speed with when the majority of publications are printed. Whether weekly, monthly or periodically; quarter to quarter such as GDP figures for many developed nations, it’s very important that traders keep up to speed with the most current data about to be published.

 

How to prepare to trade the published information.

Actually trading the news upon immediate release should be a habit that inexperienced traders completely re-think, it’s tricky enough for front running algorithmic programmers to get the right side of sentiment when a high impact news event breaks, for individual traders it can prove extremely difficult. In such a fast moving market traders can fall victim of the market’s behaviour; your order may not be filled at the price quoted, you may experience slippage and your take profit limit orders may not be executed. In short it can be a nightmare experience attempting to trade the news at the point of publication. Which brings us back to the original assertion; don’t trade the news, trade the reaction to the news. Let’s analyse that a stage further, traders should make sure that they’re fully prepared and in a position to trade the reaction to the news.

Presumably our trader has kept informed regarding the day’s key high impact news events. Rather than attempt to join the massive volume of orders, that hits the market at the point of publication, our trader waits until the first fifteen or thirty minute candle directly after the publication, forms. Should the price action look attractive; closed Heikin Ashi bar with upward shadow, our trader should feel confident that he’s the right side of price and that the news release has created the necessary momentum to ensure a profitable trade. It really couldn’t be simpler and yet, like moths to a flame, far too many traders display impatience and greed, that most dangerous of ‘trader cocktails’, and enter their news trades too early.

Be aware of the news event, ensure that the appropriate time frame is selected, exercise patience, maturity and sound money management, whilst observing the probabilities caused by definitive price action, and our trader should find themselves on the right side of price when trading the reaction to news events.

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