For many of you loyal Forex Report teammates, you know I love trading news based trades. There are many economic reports that we trade monthly on all the major currencies. I typically trade the AUD and USD economic reports due to the time they come out and my own trading schedule. I typically do not trade a ton of JPY or EUR reports due to the Japanese not have a dedicated reporting schedule and the EUR events coming out in the middle of the night.
The reports I love trading are the ones with hard number expectations like the unemployment, CPI, manufacturing, consumer confidence, GDP, retail sales and the like. This is due to the Efficient Market Theory”. What this theory basically states, is everything that is known to the market is embedded in the price of the market. Years ago I had a good friend of mine call me up and ask “Let’s buy the Iraqi Dinar”. I knew of the deregulation coming out concerning the Dinar, everyone did. However, my friend was adamant that this was going to make him rich. I tried to explain to him that if he knew something then it was an absolute certainty that the financial institutions and hedge funds on Wall Street knew of this as well and the price of the Dinar would reflect the rumors we were all hearing at the time. The simple reality is that my friend did not understand the Efficient Market Theory nor did he understand that is was most likely some institution who created the newsletter that he originally got in his email about the Dinar.
This is why I love the events with concrete numbers concerning the expectation. For example, the Unemployment report is released the first Friday of every month, about a week before the release there will be a market expectation that is announced and embedded into the price of the market. When the report is released, the new number is embedded into the market with great efficiency. One of the reasons it is embedded with such high probability is due to the High Frequency Traders otherwise known as HFTs. The HFTs are algorithm based programs that auto trade the number. It really does not have as much to do with technical analysis as it does the number. If the unemployment number is lower than expected, the dollar should rise, if it is higher the dollar will fall. It is also important to note that the traders are not actually trading the number, the algorithm is. The number is immediately sent to the computer to process the new number into the market. The only thing the traders do is control the overall risk to the portfolio.
HFTs are extremely fast and con embed millions of orders in fractions of seconds. They are most certainly faster than we as individual traders are. How do we compete with such a massive, expensive ROBOT? The answer is simple, prepare. As many of you have heard me say many times, success in life is a product of design. We first plan and then we execute. If we know that the Robots are going auto trade the number, we simply need to place orders at key levels of support and resistance. I typically will look at the 1-5-15 minute charts 5 minutes before the event to see what areas of support and resistance I am comfortable trading above and below and place orders. See a trade on the release of the retail sales number below.
The other events you can trade news based trades on is the central bank announcements such as the policy statement or the minutes released after the policy statement. However, these are a little more difficult as they are not a concrete number that is being embedded. For example, today the FOMC is announcing monetary policy at 2:00 pm EST. The initial announcement will be treated like many other economic reports in that you will see big movement one way or the other. This is based on the language of the report. In today’s announcement it will be pertaining to the FOMC Patience language. I spoke about this in the forex report this week as well as the market recap on Monday. Once the market embeds the new language, whether it takes out Patient or not, the market starts forecasting. This is very volatile as once again, it is not a concrete number do there is some subjective trading happening. The last thing is Yellen’s speech which will the market.
There is a high potential for volatility throughout the entire process of the FOMC announcements which make them some of the funnest and craziest news based trades. I look forward to trading the event from 38,000 feet in the air as I Fly to the Greatest city on earth, New York City.
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