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The Anatomy of a News Trade

News trading is tricky business and is the realm of machine-reading algos. However, retail traders are still attracted to news releases as a “quick way to profit” from market movements. While we disagree with this mindset, we have also catered to this desire to trade certain news releases in a disciplined manner.

If you have any interest in understanding when news releases have better odds than not of delivering a successful trade, read on. Our Newsflow model is the application of our “best practices” for trading selected news items. In this short post you will understand the anatomy of good news trades, with examples from August: the RBNZ Inflation Expectations and the RBNZ Rates Decision.

Fail to Prepare, or Prepare to Fail

The first thing to understand about news trades is that the actual print or outcome is not the most important thing. It’s the deviation from expectations that matters most. This implies having a handle on what the expectations are in the first place.

Source: ForexFactory

Even a simple calendar will provide some of this information. For releases such as Retail Sales, GDP, Employment Change…basically anything with a numeric outcome, calendars provide the market’s consensus (what is expected).

But for some releases (Central Banks, Central bank Minutes, Inflation Expectations, Speeches) which are equally market moving, a calendar is not enough. You need to do some investigating using proxy measures. We describe the approach behind the Newsflow signals in our News Trade Identification Plan.

Here’s what was sent to subscribers on August 7th 2018:

This data point could be influential for the RBNZ’s meeting later in the day. So it may also be market moving. Our proxy measures would suggest higher inflation expectations, which would be bullish NZD and might skew the expectations for the RBNZ’s meeting a tad.

and our trade suggestion was as follows: Sell GBPNZD on higher inflation expectations.

Our analysis isn’t always correct of course (we have a 60% strike rate since inception in August 2017) but we need a starting point in order to understand market expectations. The market’s consensus can be (and often is) incorrect or does not incorporate the most recent data available.

Doing homework allows you to be prepared for the event and trade with confidence if the market offers an evident, logical reaction based on your findings. That is what we highlighted in the 1Min chart above: the algos jumped on the stronger Inflation Expectations which means there was a material surprize.

The other factor that inspired this particular currency pair was the fact it was already trending lower. So a good data print from NZD would have likely enhanced the trend.

Sentiment Gives you an Edge

Nearly 12 hours after Inflation Expectations, the RBNZ was to communicate their decision on rates. Given the vicinity of these 2 events, we can describe how market sentiment was likely playing out.

First, the market was surprized to see stronger inflation expectations come out of the RBNZ. The background to this was a rather neutral/dovish RBNZ stance in previous communications, hence the surprize. Here is what we wrote to clients, regarding the RBNZ Rates Decision:

It will be interesting to see how the RBNZ balances the stronger inflation expectations (data issued this morning, which pushed Kiwi quite a ways) with lower growth expectations. Inflation is still well within boundaries and the RBNZ isn’t hiking anytime soon. But perhaps the language will be more benign?

The market was naturally counting on some kind of hawkish stance, or at least an acknowledgement by Governor Orr that inflation expectations were ticking up. After all, central banks are basically inflation targeters. But since the cold, hard data was inconclusive regarding a clear bias for the statement, we gave clients the following recommendation:

Since no change is expected and since there are both upside risks and downside risks, the only play is to remain flexible. Wait  until the rates decision and initial statement have been issued. Target GBPNZD shorts on a more hawkish RBNZ and AUDNZD longs on a more dovish RBNZ.

Stacking the Odds

Our Newsflow model is an educational service first and foremost. Where most retail traders are looking for quick pips, we train traders to stack whatever ex-ante odds they can. Instead of focusing on the money or the outcome of each single bet, we train traders to focus on a proven process that should deliver good results over the longer term.

  • By doing some simple homework you can understand the market’s expectations well
  • By waiting for the release, you avoid gambling and getting poor execution/slippage
  • By only acting when the market reacts in a manner that is logical to you, your confidence level is boosted.

You can smack any trigger you want on these kinds of trades. The bottom line is that the odds are greatly tilted in your favour, not just for the knee-jerk reaction to the news-event, but potentially for the following hours.

Over to You

Trading the news should not be your primary trading strategy, given how aggressive and volatile it is. But it can impact your bottom line, and if nothing else allow you to understand market sentiment in a more in-depth way. Emerging fundamental developments shape markets and cause participants to adjust their positions as their future perception of value changes.

But if you do decide to confront the news, do so in a disciplined and consistent manner. Be prepared, and only act when the market complies with your analysis and acts in an evident and logical manner.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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