Technical Trading After News Events

[RichardCox 10]

Traders that are focused solely on price analysis tend to make arguments suggesting that fundamental or economic factors can be largely ignored in favor of pure chart analysis. Typically, these arguments rest on the idea that all of this information is already contained in the price itself and that studying this data is an extraneous activity. For these reasons, there tends to be a rather large disconnect between traders that use technical and fundamental analysis, as well as chartists and those that pay special attention to news events.

 

But completely disregarding fundamental factors and significant market news events is a dangerous practice for a variety of reasons. At best, this will limit the number of trading possibilities you can identify. At worst, this can leave you unnecessarily exposed to risk when major fundamental events are about to occur. The forex market is always moving and traders are always reacting to the latest news and developments, and pushing market prices in the appropriate directions. There is very little downside in at least knowing when significant news events are about to occur and exercising the ability to bridge the gap between technical and fundamental analysis and make your trading strategies more comprehensive and complete.

 

Maintain an Awareness of Session Changes

 

During the businessweek, trades are being placed virtually every second. But even with a 24-hour market, it should be remembered that certain locational sessions dominate certain hours, and new is typically generated when these sessions are starting. For those looking to base trades after news events, the times can be great for creating technically-based trading opportunities. Traders that are aware of these occurrences will have an edge over those that are oblivious to these factors. To be sure, there are some market events that will have a greater impact than others, and major news events will not occur every day.

Specifically, this edge comes from added foresight and the ability to better manage risk before markets become especially volatile (a common reaction after major news is released). In addition to this, trade directions can be identified in their earliest stages as the initial drivers of market momentum can be pinpointed with extreme accuracy. News events will often be the reason trends change, so for those looking to implement contrarian strategies (buying low and selling high), it is important to be able to isolate areas where these changes might occur. Trading probabilities can be increased this way and overall returns can be improved when watching these factors.

 

Since news events and economic data tends to be released at the beginning of each session, it is important to have an idea of when these sessions begin and end. The Asian session starts the week, and runs everyday from 11pm to 8am GMT. The European session runs from 7am to 4pm GMT. The North American session runs from Noon to 8pm GMT. Volatility typically slows in between these sessions, and this favors range-bound strategies. Once liquidity re-enters the market, volatility starts to pick up again, and this is especially true when a particularly important news event comes. In these situations, breakout strategies become more efficient as markets determining the main trend of the day.

 

Judging the Importance of the Day’s News

 

For technical traders, perhaps the most difficult task will be to determine the relative importance of a given piece of news or economic release. The main problem here is that there are no hard and fast rules for understanding which events will be market moving on which days. There will be times when inflation is a central issue for a particular currency pair, while at other times growth data might be a bigger price driver for that same pair. Because of this, it is important to have a strong sense of which data the market is watching at any given time. Generally speaking, interest rate decisions and employment data tends to have a significant impact on price activity. This is because higher interest rates increase the total return that is gained or lost when holding a certain position.

 

For example, the Australian dollar has relatively high interest rates, while the Japanese yen has long been associated with low interest rates. Long positions in the AUD/JPY generate interest rate yield while short positions in the same pair require interest costs to be paid. If the Australian central bank made the decision to raise interest rates, it would be a bullish event for pairs like the AUD/JPY. So, when an interest rate decision is scheduled for a specific country, it is a good idea to watch price action and base trading decisions on the eventual outcome. Price volatility will often increase when interest rate decisions are made, a scenario that tends to benefit breakout strategies.

 

Basing Trading Strategies on Expected Volatility

 

Once we are able to identify high importance news events, we need to settle on a strategy to trade off of the expected changes. Generally speaking, price volatility will come to a near halt before major economic releases. This is because traders are not as willing to commit to positions before the economic results are known. This is usually a wise approach, as it helps to prevent traders from getting stopped out if the position initially taken does not agree with the data release or news event. It doesn’t make much sense to get into a bullish position when there is a 50/50 probability that the economic data will have a bearish effect on your chosen currency pair. Since its usually a good idea to wait for the event risk to pass before establishing positions, let’s take a look at an example of how prices might perform prior to an interest rate decision.

 

In the charted example, the USD/JPY is showing a low volatility downtrend prior to an interest rate decision from the Bank of Japan. Those in positions before this decision were clearly taking on unnecessary risk, given that the outcome was still unknown. Once the scheduled decision was released, the outcome was highly bullish for the USD/JPY pair, and this is later reflected in the upside price volatility.

 

When looking to place trades in this situation, buy orders could have been established just above short term resistance levels, while sell orders could simultaneously be placed below short term support levels. This is because news events tend to favor breakout strategies as new trends develop. Stop losses can be kept relatively tight in these cases because significant follow-through is almost always expected.

 

Staying current on geopolitical news and economic data releases can be helpful for both short and long term traders, and can help to reduce some of the risk associated with trades that are placed before major changes in volatility are expected. The biggest challenge is to know which market events will have the biggest impact on prices, and in which pairs will be most influenced by the releases. Technical traders can still use their skills for these trades, as breakout strategies tend to work well once these situations are seen.

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When looking to place trades in this situation, buy orders could have been established just above short term resistance levels, while sell orders could simultaneously be placed below short term support levels. This is because news events tend to favor breakout strategies as new trends develop. Stop losses can be kept relatively tight in these cases because significant follow-through is almost always expected.

 

Many times all your simultaneous orders, long and short, are triggered with hefty slippage and you lose your shirt