The first rule is to define a profit target and a stop loss level. I just wanted to ask, in your opinion, is it wise to focus on a few pairs or should i scan as many pairs as possible for set ups? Finding the right Forex strategy is tough. In a contracting economy, a high CPI value may prevent the central bank from realizing counter-cyclical interest rate reductions. While the exact figure is debatable, I would argue that there are less than ten popular styles in existence.
Trading Styles vs. Strategies
Nor does the experienced trader have any trouble in acknowledging this fact: The short-term trader is not much bothered by this fact, but it has great significance for decisions on the long-term positioning.
Some traders position themselves on both sides of the market before a significant release using a hedged position. They wait for the number to come out and then proceed to trade out of the position. For example, they might take a loss on one side during a post number correction, after having hopefully taken a larger profit on the winning side of the trade.
This straddle or hedge strategy consists of going both long and short in the same currency pair before the release of the economic number. Action is not taken until after the number is released. Generally this involves taking both a profit and a loss. If the number was favorable, often the trader will first take profits on the trade first. This enables the trader to allow the other unprofitable leg of the position to decrease the loss on the position as the market corrects after it made an initially often exaggerated reaction to the number.
If the number released was unfavorable, the same basic follow up strategy can be taken as the market falls by closing the winning short position first, and then trading out of the losing long side of the hedged position.
A variation on this technique involves placing a stop loss immediately on the losing position and waiting for the stop loss to be hit. Once the stop loss has been filled, the winning side of the position can be held for additional profits or liquidated immediately.
Several academic studies have established that the impact of some news announcements have their immediate impact spread over a period of weeks and months, instead of the single day in which the markets are thought to discount them. Non-farm payrolls, and to a greater extent, the interest rate decisions of the federal reserve are good examples for this kind of news flow. While the markets react violently and unpredictably in the short term, the mechanisms set up by low interest rates, and full employment or conversely, high unemployment have consequences that are relevant to many sectors of the economy, and trading them on a long term basis is certainly possible.
The trader who uses this strategy will build up his positions slowly, and will attach greater value to low frequency releases such as GDP reports , and will wait until the overall picture offers clarity, before he makes his trade decisions. To trade news on a short term basis, the trader must have a clear criterion on what kind of news will justify a trade. Many news traders seek at least a 50 percent surprise in the data to consider the release tradeable.
The novice trader, in turn, can use the initial period of his trading career for perfecting his money management skills. Trading the news on a short term basis can be easy and lucrative if the trader is disciplined enough to cut losses, and accumulate profits, but panic and mood swings, and undisciplined methodology will quickly erase all the gains through shocks and volatility. These are the various types of indicators which have the potential to cause the greatest short term movements in the markets.
While very important, the severity of market reaction to CPI releases partly depends on the health of the general economy. In a booming economy, a string of uncomfortably high CPI values will force the central bank to raise rates in order to subdue growth.
In a contracting economy, a high CPI value may prevent the central bank from realizing counter-cyclical interest rate reductions. Since central bank rates are so important for determining the tone of economic activity in the long term, markets pay great attention to the value of this indicator. On the short term, of course, these considerations have no relationship to the motives of speculators, but they do present the justification for violent short term price spikes for momentum traders and short-term speculators, if the data surprises in either direction.
Depending on the nature of the decision, and how surprised by it the market is, the price swings can be very large and the immediate reaction meaningless with respect to the long term direction of the trend. Fed decisions are one of the most anticipated events in the market, and their macroeconomic significance certainly justifies this attitude.
The Fed meetings typically last for about two days, beginning on Monday and concluding on Tuesday. Then the decision is released to the public at around 9 pm New York time. Fed rate decisions can cause large movements if the rate change is different from what was expected by market consensus.
In the absence of such a surprise, traders will concentrate on the tone of the statement accompanying the interest rate decision. Depending on how dovish or hawkish the statement is, the markets will readjust their future interest rate expectations, and on that basis they will reprice currency pairs. European central banks and the US Federal Reserve usually release their rate decisions during the first week of each month.
As most of the important data are released during this first week from around the world, traders are exceptionally nervous and excited, amplifying volume greatly, but also increasing volatility, as the large amount of short term speculative money opens and closes very short-term positions. In fact, some traders turn the typical movements of this period into a trading strategy. Another key news item that can prompt significant forex market volatility is central bank intervention that is usually announced over major news wires.
Sometimes called the mother of all data, on a typical month the time of this release coincides with the most volatile market action. Non-farm payrolls measure the payroll change of the non-farming private and public sectors. Since economic cycles, consumption, and consequently interest rates all depend on the employment situation of the US economy, the non-farm payrolls release is the most closely watched of all indicators.
For the most part, most experienced traders will avoid trading the immediate aftermath of this release, due to the somewhat nutty price action that follows it. While this data is so crucial to a nation like the US with a large domestic economy that is less dependent on trade and commerce, its equivalent is not as important for nations like Japan where the dynamics of the domestic markets is closely correlated to the situation of the global economy.
The non-farm payrolls data is typically released by the Bureau of Labor Statistics on the first Friday of each month. The PMI provide a very quick and accurate snapshot of the status of the various sectors of the economy. They do not create as much volatility as the other major releases such as the non-farm payrolls data, or Fed decisions , but as a result they are also more tradable and safer as entry points.
Needless to say, a very extreme value can create massive price shocks in either direction, but the real use of this data is for the guidance it provides for predicting the much more important data that is released towards the end of the week. We can trade these releases both on a trend following, or contrarian basis, depending on what our analysis is telling us about market positioning and the fundamental picture.
The unregulated and global nature of the forex market tends to make trading on insider information very unlikely compared to how trading is conducted in the stock markets. For example, the market consensus for the June NFP report was k versus k previous reading. This means that the market sentiment and the build-up ahead of the news release were quite positive. However, the NFP reading below k is still not enough for the Fed who seeks to hike rates, in which case it needs to see stronger evidence of a healthy labor market.
We want to emphasize the importance of relying on technical analysis and price action when trading the Forex news events. Actually, trading the news without the price action is more like gambling because the price can give us lots of information on the news before it even gets released.
The easiest way to interpret the price action is through support and resistance and our team at Trading Strategy Guides is proud to show you how to correctly trade support and resistance here: There is an unspoken truth about trading which is that when the majority of the market participants are positioned on one side of the market usually the market goes in the opposite direction. In our case, we can note how the majority of traders were positioned long going into the NFP release and they must be wrong.
Only trade when you can establish a firm bias and when you have strong evidence to support your trading idea. When trading the forex news you need to pay attention first to which currency to trade, secondly is the direction up or down , thirdly you need reasons and evidences to support your bias. You also need to know what the market expectation for that Forex news event is. Every economic calendar comes with forecasted figures for all Forex news events so this is easily accessible to you.
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