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Sunday, June 1, 2008

Trading Fundamental Announcements

Fundamental Analysis
Trading the news has always been a popular method of trading in the forex market. Time and again currency pairs move 50 to 100 and more within minutes or even seconds after a major announcement. Many factors have changed in recent years though, with most brokers no longer guaranteeing prices or spreads.

The days of trading large positions on a single move and exiting the trade equally as quickly are gone. During news releases these days most brokers treat forward orders as market orders. Because of the increased volatility just prior to and during these announcements, spreads are widened sometimes by as much as 20 to 30 pips and orders are unlikely to be filled at the predetermined prices.

This leads to stop losses being triggered at non market related prices, causing a far larger than anticipated loss. Entry into the market will generally be at a higher (long orders) or lower (short orders) price than the order intended.

If we consider the following set-ups we can see some of the pitfalls.
Long eur/usd at 1.5550 and up 10 pips on the trade with price at 1.5560. Recent releases lead you to believe the news is likely to be bad for the US$ and the market is likely to go even more your way when the news breaks.

Five minutes prior to the news you tighten your stop to just 20 pips from entry to 1.5530 just in case the news is better than expected and you can limit your loss. Two minutes before the news volatility increases and price briefly drops 10 pips back to your entry point, at the same time spreads widen to 20 pips and trigger your stop at 1.5530 causing a 20 pip loss before the news even comes out. The next minute or so see prices bounce between 1.5550 and 1.5560 and when the news breaks it shoots up 80 pips in the first minute or two and you kick yourself for tightening your spread.

Your initial presumption was correct, the news was bad for the US$ yet you sustained a 20 pip loss. Had the move however been in the opposite direction with an 80 pip move against you your loss would have probably only triggered at 1.5480 or worse if the spread was still at 20 pips causing a 100 pip loss instead of the 20 pips you initially planned for.

Alternately you may have decided to place a buy stop order 20 pips above the market price of 1.5560 to enter long at 1.5580 with a profit limit of 30 pips to be triggered at 1.5610. Price shoots up 80 pips to 1.5640 where your buy stop is filled rather than at 1.5580 which is 60 pips higher than you intended entering the market. Price starts to retrace and triggers your initial profit limit order at 1.5610 causing a 30 pip loss before heading long again.

These may be real possibilities so Why bother to trade the news?

With many currency pairs to choose from there are generally five to ten economic news releases every day from the various countries. All these releases are scheduled well in advance so we can regulate our trading accordingly. This allows us to choose the releases we want to trade and ignore the releases for the currencies we do not trade.

There also key reports that cause significant volatility with large sudden moves in the market that we can focus on.

Generally the economic calendar gives us the previous figure and the forecast figure. The difference between the actual figure and forecast figure is what determines the volatility and size of the move. The larger the deviation the larger the following move. Therefore news that comes out as expected according to analysts forecasts generally causes very little market reaction.
News also differs in significance which simply means certain announcements have the potential to create larger moves with more volatility than than less significant news items.

The actual number released is significant for the long term direction of the market but creates short term trading opportunities for break out traders and scalpers that sometimes only last a few minutes.

Often the market is very quiet prior to a major announcement because traders are staying out of the market in anticipation of a large move when the news breaks. The general belief is the quieter the market is prior to the announcement the larger the move is likely to be. This is because traders are sitting on the sidelines awaiting the announcement and then all jump in the moment the news is released. This often causes serious volatility and sometimes major moves in the market.

Trading the news
The first decision is to determine whether or not the news is tradable as some announcements can result in major volatility and whipsaw making it impossible to trade. The news could also be insignificant and hardly cause a stir in the market making it a no trade.

We need to consider the factors that have been influencing the markets recently, like inflation concerns, employment or balance of payments etc.

To be a successful fundamental trader requires studying the reports and keeping records. For example we need to record the expected number, the actual number, the deviation and the subsequent market move caused by that amount of deviation.

Only by keeping accurate records over a period of time will we be in a position to decide prior to the announcements what amount of deviation will trigger a move significant enough to trade and estimate the size of the move based on our recorded data.

Demo trading the news based on your analysis is the next step until you get a feel for how much of a surprise is required to trigger a tradable move and which news items to avoid because of their volatility.

Preparation is the major key to success in fundamental trading and will only bear fruit through diligence and practice.

The preferred method of most traders is to trade the numbers when released. Assuming the US employment figures were about to be released and analysts expected 150 000 new jobs had been created for the past month and the actual figure reported that 250,000 new jobs had been created suggesting future growth and a strengthening economy, the obvious decision should be to buy the US$.

If however the figure only reported 100,000 new jobs had been created then the obvious move would be to sell the US$ as less jobs had been created than expected suggesting a possible slow down in the economy.

Many traders also do straddle trades by placing stop orders above and below the market price prior to the announcement with the belief that the market must go in one direction or another. If the report causes enough volatility whipsaw can cause both orders to be triggered and slippage due to spread widening can cause substantial losses in both directions. At times when the market does run in a single direction the method can work well. Bear in mind though that many brokers will freeze new orders 30 minutes prior to a major announcement.

The following table lists the various countries news releases based on the size of each country’s economy, the frequency of their news releases and their currencies liquidity.


SymbolCountryCurrencyGMT Time
USDUnited StatesDollar13:30 - 15:00
EURGermanyEuro07:00 - 11:00
FranceEuroO7:00 - 09:00
ItalyEuro08:45 - 10:00
JPYJapanYen23:50 - 04:30
GBPBritainPound07:00 - 09:30
CHFSwitzerlandFranc06:45 -10:30
CadCanadaDollar12:00 - 13:30
AUDAustraliaDollar22:30 - 00:30
NZDNew ZealandDollar21:45 - 02:00

The following are the major announcements to monitor.

  1. Employment Growth (Non Farm Payrolls)
  2. Interest Rate decisions
  3. Trade Balance
  4. Gross Domestic Product
  5. Retail Sales
  6. Durable Goods
  7. Inflation reports (Consumer Price Index and Producer Price Index)
  8. Foreign Purchases report (TIC Data)


Summary

  • Trading the news is not easy for the novice trader and if you are not sure rather stay out of the market and close existing orders before the news comes out.
  • Familiarise yourself with your brokers policy regarding news releases spreads and orders.
    Check your economic calendar daily.
  • Keep records of the important news releases and the market movement that results from the deviation.
  • Familiarise yourself with the important events that are influencing the market, specially the US Federal reserve reports and concerns as these seem to have the biggest influence on the market.
  • Even if you do not trade the news you need to check the economic calendar daily and familiarise yourself with the important ones to ensure you can deal with your open trades prior to the announcement.

12 comments:

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