As you probably already know, there are many successful traders that trade on forex news from fundamental point of view. However, most of the traders get the concept of ‘news trading’ totally wrong and lose their money time after time. This is because they base their trading decision only on the fundamental market laws and fundamental analysis.
My statement: Trading by blindly following fundamental analysis is totally wrong!
In this article I will show you:
- Why fundamental analysis does not work like people think it should work
- How to trade news properly
- How to automatically disable EA’s during major high impact news event
1. Why fundamental analysis does not work like you think it should?
Most people think that they can base their trades on a general fundamental view on the market and use few basic economic laws to predict the market direction. A simple example: when FED (The US Federal Reserve) raises the interest rates, the basic economic law says that the dollar should go up. This is because in this case, the dollar will become an attractive currency to hold (in any US bank) because of a high interest rate. In this scenario people would buy dollar and sell other currencies, dollar should go up!
So let’s look at a real life example on what market does when FED announces a rate hike. For this example let’s look at the FOMC (Federal Open Market Committee) that took place on 15 March 2017 (Ms. Janet Yellen in the figure above). I have selected this example because March 15 was a very interesting day for a currency trader (but also for me personally). Below a screenshot from ForexFactory calendar:
On that day, during a press conference at 8pm (CET time) the FOMC announced a new rate hike. The basic laws of economics say:
“When US interest rate goes up = dollar should go up = EUR/USD should go down”
So let’s look at the EUR/USD chart on that day in the evening:
And the EUR/USD went up?? I guess many traders who were hoping to get few pips of profit on a stronger dollar were quite surprised 😉 So what happened here? Apparently the market did not read the book called: “basic economics” and the EUR/USD pair went up instead of down?
And this is where the most traders are losing their money. Because one thing that most traders do not know, is that there is a huge difference between ‘expected news‘ and ‘unexpected news‘ events! When analyzing the EUR/USD price movement on that evening, we can see that two different news events happened almost simultaneously:
A. Expected news: (News with already expected outcome) FED raised the US dollar interest rate during the FOMC meeting. This was ‘expected news’, because long before this news event, in previous weeks and days, there were many market rumors, that Ms. Janet Yellen from FED will finally announce another ‘rate hike’ during her next presentation. And the most of analysts gave up to 80% of probability of rate hike long before the FOMC meeting took place. Basically this interest rate raise was already ‘priced in’ by the market and all smart traders long before the news event on March 15.
B. Unexpected news: (News with unexpected outcome) On the other continent (in Europe), Dutch parliament election were taking place (in The Netherlands). And there was a big element of surprise related to that event, because nobody knew if Dutch populist party PVV would win or lose those elections. In case of winning this would be a very negative signal for Euro-zone and Euro would drop very hard. However it turned well for all of us (especially me since I am an emigrant living in The Netherlands) and the populist party PVV did not win those elections! On that day I was watching the Dutch television with my laptop on my lap and just in few seconds after first official exit-poll was announced the Euro went up like crazy!
Very important note: in most cases the ‘unexpected news‘ is not a direct ’cause’ of the market move, but rather just a catalyst of market forces that were already in place. Secondly, the only thing, we can relay on is the correlation between the ‘news’ and the ‘move’! The market moves only when the ‘news’ is supported by market sentiment (the collective herd behavior of all market participants). This is the most important sentence on this whole page. Please try to understand this, and you will become much better trader. So, in the example above, the EUR/USD went up, because the unexpected and positive news was supported by the overall bullish bias for the euro. This market behavior is can be explained by the concept called ‘teflon euro‘ (just google for it), which means that in most cases, the market will use any valid excuse (any positive news) to buy euro.
2. How to trade the market news?
Strategy A: scalping the market directly after the news:
One way to trade the news, is to trade only on ‘unexpected news’ (news with an unexpected outcome) and to enter the market very fast! In most cases the first reaction to the news comes just in minutes/seconds after the news release. After few minutes you are already too late to scalp the market and there is a big risk of pull-back since people will take their profits after just few pips of gain. In order to be very fast you need to have access to real-time information. One platform I can recommend is RANsquawk forex news service. This service provides real-time ‘no lag’ information updates, so you can trade all news without any delays and never miss any trading opportunity. If you want to read more about this service read more here: RANsquawk
Furthermore, my free version of hedging EA contains a news trading option that makes you able to preset trade entry conditions based on pending horizontal entry lines on chart. You need to disable recovery option by setting EnableRecovery to ‘false’ and enable news trading option by setting EnableNewsTrading to ‘true’. This is an ideal tool for trading news events. You can learn more and grab it for free HERE.
Strategy B: Trading the correlations between the news and market moves:
This is my favorite news trading strategy, since it is easy, clear and effective way for trading the news. In this strategy you can trade the news in direction dictated by the prediction which is based on the previous news releases and previous market moves. So for example when a given forex pair move (after a news release with a given outcome) was the same or similar for all previous 10 news events, then you have an increased chance that it will happen again! Here is how it can be done:
Step 1: Find a high impact news event
In order to find all high impact news events, you can go to free ForexFactory calendar and select only red flagged news. Then select any news event you want to trade
In this example let’s select ‘Michigan Customer Sentiment = UoM’ as our target.
Step 2: Find a correlation between the news and market move
This steps requires an external tool (see automatic selection below) or some data mining skills (manual selection).
Manual selection: For example you can use forex calendar filtering option to filter out only the selected news event for the past 12 months. Then you need to open a chart (on your MT4 platform) of the related currency (currency pairs) and mark all dates where this particular news event has happened. Then you need to seek for market reaction correlations by looking in which direction market has moved directly and within few hours after the news release.
Automatic selection: There are many tools that do this work for you. I’m using the “events & trade” portal which is available on my broker: markets.com. Here is how it looks like:
This simple web portal not only tells you what are the best upcoming news trading opportunities, but it also analyses up to 12 previous outcomes and it calculates probability of profitable trading in direction dictated by the news. You can read more about this tool here: Visit “events & trade” website.
For this example we will target USDCAD pair which has a 80% probability (for a profitable trade) in case when the ‘Actual’ value provided during the news will be higher than the ‘Consensus’ (the forecast) value. See figure below:
Step 3: Setup your trade and wait for the news.
So in this example we can tell upfront that when the ‘UoM Consumer Sentiment’ news will result in a ‘Actual value > Consensus’, then we have a big chance that USD/CAD pair will move in the ‘BUY’ direction within 4h and 12h time-frames. Lets see what happened in this case:
In this case the outcome from news was positive, since 98.0 > 97.1. Let’s see what was th reaction on USD/CAD on this positive news:
So in this case the price moved as predicted, this would result in a profitable trade!
3. How to avoid trading during news?
If you would like to avoid trading during the news releases and avoid fast market moves, you can look at my EaBlocker indicator. I have created a simple indicator that allows you to automatically disable AutoTrading during given hours and also on major market news releases.
You can read more about it on the product page: HERE.
– To summarize we can say that forex market (like any other market) is driven by not more than three factors:
- Long term forces dependent on global fundamental view (e.g: policy of central banks)
- Short term rallies on unexpected news events (e.g: Geo-political events)
- Market sentiment (I will discuss this in one of my next posts)
– For successful trading during news events you can use one of the following strategies:
- Fast market scalping directly after news release See RANsquawk website.
- Trading long term news to market response based on previous news to price moves correlations See “events & trade” website.
– If you want to avoid trading during news, you can use my EaBlocker indicator.
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