Do you trade the economic news releases?
Some traders thrive off them… the sudden injection of volatility can send the market soaring.
One-hundred-pip moves in less than a minute are not unusual. You can tuck away a week’s worth of profit in less than the time it takes to finish a cup of tea…
Trouble is, it’s a real double-edged sword. Things can go wrong just as quickly!
We had a bit of a discussion about this in the beta testers group last week. The strategy we’re working on for you CAN work during news releases. But I still recommended taking a 15-minute break from the markets before any market-moving event.
For the system we have under test, the spiky reactions to news can turn what is a genuine calculated edge into more of a coin flip… you just don’t know how the market is going to react to the released data.
(Unless you already know what the figures are in advance – more of that in a moment!)
But that doesn’t mean a complete blanket-ban on trading around the big reports.
Here are the three options you have open to you when it comes to the economic news:
- You can stand aside: stop looking for trades 15 minutes before a release, wait for the dust to settle, and then go back to business as usual. (Some traders even take the whole day off when the big items are due to be released.)
- You can trade the reaction: one way is to place resting stop orders that will get you into the trade as it breaks-out on the release of the report. You can even place Stop orders both above and below the market letting you take advantage of a break in either direction
- You can take a position BEFORE the report: take an outright position according to your analysis of the likely direction of the reaction to the report. You then let the momentum created by the news propel your trade along in double-quick time.
I’ll show you an example of each of these in a moment.
But first, exactly what are the market-moving releases and how best to find what’s due out today?
Here are a few big events to keep your eye on:
- Employment Situation – the big indicator of economic health. It’s the most closely watched economic statistic because it reflects changes in the economy on a relatively accurate, month-by-month basis. The big one is the US report released on the first Friday of the month (you’ll also see it referred to as ‘Non-Farm Payroll’ or NFP).
- Interest Rate Decisions – central banks review and amend the current base rate on a periodic basis. The idea being they use skill and judgment to encourage sustainable growth in the economy without affecting the stability of the home currency. A delicate balancing act indeed!
- Trade Balance (or GDP) – the value of a country’s exports minus the cost of its imports gives you the Gross Domestic Product. It tells us if that economy produces more than it consumes. Two consecutive quarters of negative growth and we’re in recession!
- Retail Sales Index – compiled monthly from a sample survey of large businesses and a representative sample of smaller ones. It gives an idea of consumer’s appetite for spending and is a rough indication of economic strength or weakness.
- Comments from key economic figures – heads of central banks (Janet Yellen in the U.S, Mario Draghi in the Eurozone, Mark Carney here in the UK) and their cohorts can all have a big effect on the market if their comments are off the beaten track, or suggest an unexpected forthcoming change in policy.
And there are plenty more reports that come into play depending on what the market is focusing on at that particular time.
But don’t worry about knowing the ins and outs of them all.
You don’t need to become a professor of economics…
There’s an easier way to stay on top of what’s likely to move the market in the coming days.
Investing.com has a nice and simple (and free) economic calendar that you can refer to so you know exactly what’s on the horizon.
Here’s the link: Forex Calendar
You can filter out just the currencies you’re interested in and simply stay aware of any reports they flag as “high volatility” (three bull’s heads)…
Set an alarm to warn you 15 minutes before any big reports are due and then take your stance.
So let’s have a look now at examples of those different trading approaches I mentioned earlier… once your alarm has sounded, here are three ideas you might consider.
I’ll use last week’s US job numbers as an illustration.
Option1: Stand aside
EURUSD 5 Minute chart 07/02/14
The area highlighted covers the period from 13:15 to 14:15 on Friday 7th Feb.
Starting 15 minutes before the US job numbers, if you simply sat on your hands, you allowed the market an hour to flush itself clean of volatility.
You might then have gone looking for less-risky entries. The secondary move upwards, beginning around 3pm offered a smoother, less volatile long trade.
Option2: Trade the reaction
EURUSD 5 Minute chart 07/02/14
For this example, you wait until 2 minutes before the report is due and place stop orders above and below the most recent price action. You’d be a buyer if the market moved up through your stop order (blue line) or you’d be a seller if the market moved down through your downside stop order (red line).
Here we see the market take out the upside order and carry us along for a quick 50 pips to the upside in less than a minute. You could place a limit order as an upside target to get you out of the trade automatically.
CAUTION: You must have a larger appetite for risk before you consider trading like this. Make sure you have a carefully considered stop-loss as part of your trade management.
Option3: Take a position before the report
EURUSD 5 Minute chart 07/02/14
Did someone already know the numbers?
Here we see classic accumulation patterns (underlined green) as the market is knocked down lower (red arrows) and held.
This had the markings of an engineered move to keep the market suppressed while someone, somewhere loaded up a rather large long position. We headed into the release at 13:30 and their money was made on the break upwards.
All very well in hindsight of course… the skill is in spotting this kind of activity in real time, backing your hunch with a position of your own, and then letting the market pay you out on the momentum move.
So now you’ve got a few ideas to play around with, let’s see what data releases we’ve got due out this week.
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
Wednesday 12th February:
08:15 CHF Swiss CPI
10:30 GBP BOE Inflation Report
15:30 EUR Draghi Speaks
Thursday 13th February:
13:30 USD Retail Sales
15:00 USD FOMC Yellen testifies
If you get chance, also have a look at some recent price action surrounding the big data releases. See if you can spot the signs that someone, somewhere knew what was coming beforehand.