In EURUSD for example a move of 1% is about 120 points and 2% about 240 points; technicians can spend a whole month trading “breakouts” to make 240 points; a well played “news trade” can make it in a few short hours, without any pain. Clearly, many news trades are simply a price adjustment to reflect new information; the new information is quickly reflected in the currency price.
I have been trading news for a long time; as traders catch on I know the window of opportunity will slowly close; it has already begun. On-line brokers are refusing to accept stop loss entry orders around significant news time. Currencies are moving 50 points or more within a minute of major release.
Banks are getting the “news trade” orders from the on-line brokers and waiting until the market becomes super-thin less than a minute to release time and then “running” the stops (forcing the market higher or lower to levels where significant amounts of stop loss orders are; the purpose is to eliminate event risk for the Bank and also to make profit from the orders). Obvious examples are April 8 and May 7 non-farm payrolls. On April 8 the EURUSD moved 50 points lower in two minutes prior to non-farm payroll release; on May 7 EURUSD moved 70 points higher in one minute prior to release.
Beyond hitting home runs on misforecast key economic indicators, I use economic indicator releases to determine market sentiment and initiate short-term trades. Here is an example.
On Tuesday April 27 Conference Board consumer confidence was 92.9 versus 88.6 expected; if market sentiment was balanced EURUSD would be expected to drop between 50 and 75 points on such a drastically better than expected U.S. number.
EURUSD was 1.1875 before release and fell to just 1.1860 after release; after trying to trade below 1.1860 twice the EURUSD rallied to 1.1935. When a misforecast economic indicator fails to create the expected price adjustment (in this case EURUSD lower by at least 50 points) it’s a clear indication that the EURUSD is either oversold and or there are more buyers than sellers.
Once the EURUSD rate got back above 1.1875 (the rate prior to the positive U.S. news) an excellent trade was to buy EURUSD with a stop at 1.1855 (below the low after the USD bullish news). Profit target would vary by trader.
My experience has been that price action following misforecast economic indicators provides a rare glimpse at market sentiment on a real time basis; trades can be initiated with tight stops and excellent profit potential. When combined with technical indicators such as moving averages, trading channels, and support/resistance; the resulting trade ideas can yield serious profits.
Note:
Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures Hanover, Paribas, European American. www.EurUsdTrader.com
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