Knowing how to trade the news on important macroeconomic events can set you apart from the crowd. You can categorize news spikes as volatility events. These spikes can either be short or long-lived, depending on the market environment. You can think of news events as catalysts.
When buyers and sellers and not sure about the direction of the market, economic data can decide which way markets are heading. Generally, there are only 2 possible trading scenarios: either the market continues to trade in the direction of the surprise. Thus, into the direction of the initial spike. Or, it can reverse to the mean and fade the spike in order to close the spike gap.
Note, how the price of GBP/USD is trending into the direction of the spike following the GB Core Retail Sales numbers. The initial spike starts at 1.3512 and ends at 1.3562. Within a few minutes, GBP/USD crossed the 1.3600s. Almost 100 pips. This is a momentum type of spike trade. But, how do we actually trade the news with this economic indicator?
Depending on market liquidity, you can enter the trade immediately as soon as the fresh data is released. Then, wait for further momentum to ride the trend to either a technical level, a round number, or a fixed distance from entry. Or some other price level you think is important.
How to trade the news with the spike II
Here is the second example of an after spike continuation trade on GBP/USD following a surprise in inflation numbers. Inflation was forecasted at 2.8. But surprised with a 2.9 reading and the British Pound rallied substantially. 70 pips within 20 minutes.
Professional traders anticipate the future of the monetary policy and central bank decisions. They act immediately on surprising surprises. That is why we have these event-driven rallies.
How to trade the news against the spike
When markets are not ready to advance, but an economic indicator surprises to the upside. What happens usually is that the news is quickly digested. The financial instruments spikes to the upside. Only to be sold off immediately. This is called fading the spike or closing the spike gap. Here is an example of a quick spike fade.
How to trade the news against the spike II
There are economic reports with a short release cycle. Crude Oil inventories or Natural Gas storage are released once a week. What you can observe in many instances is the tendency of these reports to fill their gap. See how the spike move is reversed within 20 seconds.
In a recent blog post, we talked about the 9 ingredients of a successful trading plan.
We learned that you need to have a trading plan that tells you
WHEN TO TRADE
WHAT TO TRADE
HOW MUCH TO TRADE
HOW TO ENTER
HOW TO EXIT A TRADE AND
HOW TO EVALUATE RESULTS
Trading is taking action in times of uncertainty. Future outcomes cannot be predicted by anyone with 100% accuracy. But, the better traders judge the probability of something to happen, the more money they will make. High-probability trade setups minimize the likelihood of bad trading decisions.
How to trade the news at the right times
You need to be sure to trade when the time is right. MacroSpike strategies are built around times when economic indicators are released and volatility is expected to be abnormally high. These events are scheduled in advance and have a binary outcome.
Either you will have a trade signal or not. There is no second-guessing. But the following is important to understand. You should only trade when the expected volatility is likely to be very high at scheduled dates. Only then, you can predict the market reaction with great probability.
You can make many mistakes when trading. In fact, overtrading for many people is their biggest obstacle to success. It is really best to find a pattern in the markets that can be repeatedly taken advantage of. If you have confidence in each and every trade setup, trading gets so much less stressful.
The bread and better trades will be the ones that will seem almost too simple and mundane but will add significantly to your bottom line over time.
How to trade the news with the right instruments
Not all currencies and futures contracts have the characteristics that we need for high-probability trade setups. You should only consider trading instruments that will react in a predictable manner to market-moving events.
That means that you can predict with a great probability that a certain deviation will lead to a certain minimum spike size. If the spike is not predictable, there is no reason to trade it. In addition, look for low transaction costs. Illiquid currency derivatives can have too big spreads. These cannot be viable candidates.
Taking US news events as an example. These events will not only impact the US DOLLAR as the underlying currency but also international stock markets like the German DAX30 Index. the Japanese NIKKEI and the French CAC40. You will see spikes on international commodity futures like GOLD or SILVER.
Also fixed income markets like the US 10-YEAR NOTES and the US 30-YEAR BONDS can move drastically. The web of international financial markets is highly connected and movements in one asset class are mutually dependent on moves in other asset classes.