Why Trade The News? (Part III)
The currency markets often jump violently after the results of the fundamental economic announcement hits the news wires. Suddenly the volatility in the markets increases. The price action smashes through the nearest and weakest levels of support and resistance when the news is released.
When the markets become violent, the price level at some point has jumped too far and too fast and pulls back. It often takes three to five minutes for the price action to reach that level. This price level is very important and this is the end of the news spike in most of the cases when the price action reaches this point and begins to pull back.
Mark this level with a horizontal line on the chart. Just before the news came out, the markets began to wake up. Some traders are placing orders on hunches, rumors and guesses. Dont forget that they cant know the results of the news before it is released.
The chances are that the currency market may move in the wrong direction as the initial reaction to the news. Most often, this last minute volatility is created by traders exiting a trade before the news is released trying to avoid volatility in the markets.
Dont pull the trigger at this point. Preserve the capital. The news is then released suddenly and the market moves dramatically. Dont trade just because you see the market moving in a particular direction 20 seconds before the news was announced. Thousands of market orders are placed just before the release of the news.
Dont pull the trigger yet. However, you now have two pieces of vital information with you now as you know the initial reaction of the markets to the economic announcement. You now know whether it was good, bad or surprising for the markets. There are unique risks like slippage, gapping, spreads and such at this point and you need to avoid these risks.
Let the market move. Stay out. Discipline is important. Dont pull the trigger. It may feel like you are missing a great trading opportunity. We now know the direction in which the market is moving. You should try to avoid the risk of trading at this point.
Once the price begins to pull back you have a better market to trade now. Volatility is still high but not wild, crazy or out of control. Slippage risk drops to zero and the danger of spreads widening is now drastically reduced.
You now know the direction, support and resistance of the market. The price retracements are often where the novices lose money. You have avoided it by waiting for the price to pull back. Now trade in the direction of the market.
You can also let the news come out, let the volatility identify the support and resistance, let the price pull back, let the price bounce again and cross the horizontal line that you had drawn. Thats too much waiting and requires good patience on your part.
Your main focus should be preservation of your capital. You should only trade if the chances of winning are high as it will keep you out of bad trades. Try to gauge the reaction of the markets. If the market reacts powerfully to the news only then trade, otherwise stay out of the trade.