Trading the market successfully requires the ability to see what is coming in advance. There’s no way to predict the future with absolute accuracy, but there are plenty of signs. Recognising what these indicators are, and how to act on them, can make all the difference. This article will outline how to do that.
The first element that you need to master is identifying which economic data point or news you should be trading on. Each and every Friday, upcoming economic events are published on an economic calendar. Each event is graded ‘low’, ‘medium’ or ‘high’ depending on the estimated market impact. You need to review the calendar and find a data release that presents a good opportunity for the coming week.
To find a good economic opportunity worthy of trading, look for economic data points that the market is naturally focusing on.
Consider the following hypothetical scenario for the eurozone:
The European Central Bank has stated that they would start to increase interest rates as soon as the consumer price index (CPI) reading hits +2%. Now, if the coming CPI release for a certain day of the week is expected to be +2.2%, we know that the market will be buying the euro in anticipation of the good data release. This is because the central bank would have openly stated that they will raise interest rates on the back of the +2% CPI reading.
As a result, you would be looking to buy the euro in the days before the data release. In order to capitalise on these kinds of trades, you must have a good grasp on what each central bank is focusing on. By doing this you will be able to recognise which economic data release presents good opportunities.
Another top tip is to always be aware of interest rate hikes. The probability of a central bank’s increasing interest rates is widely known before it is actually announced.
Let’s take a real-world example to illustrate this point. It was widely expected that the Federal Reserve was going to raise interest rates before the 26 September 2018 announcement. As a result, the USD was being bought up two weeks before that event.
Once you have chosen your economic data release to trade, you need to time your entry. For important news, like the US Federal Reserve interest rate announcement, you would use a pullback (where the price dips) towards a moving average for your entry. This could be a pullback towards the 100- or 200-period moving average on either the daily, the 4-hourly, or 1-hourly chart.
In the graph below, we see that on the 1-hour chart there were a number of opportunities to buy the USDJPY pair in the 10 days before the Fed announced they would indeed be raising interest rates.
The optimal entry time was when price returned to the 100-period exponential moving average. The entry points are highlighted and circled in the chart below. Trader’s who acted on that information would have generated very profitable trades.
If you can’t sit glued to your MT4 waiting for exactly the right moment, it is also possible to enter at market price a few days before the data release. You need to be aware of a number of factors in executing this strategy.
Firstly, how much drawdown — the amount of money you prepared to lose — can you afford in order to stay in the trade? The markets constantly ebb and flow and you may see your position go into a loss position as you await the data release. If you enter the market as soon as the opportunity presents itself, it is critical to be aware of what your maximum loss tolerance is.
Then there’s the question of when will you exit. The typical time to exit this strategy is just before the data is released. Remember, you are trading the market’s expectations in the run-up to the event. So, it makes sense to exit before the data is released. However, if you are in good profit, you may want to hold your position through the economic data release in case there is a surprise which you can take advantage of.
For example, in the US rate hike example discussed in this article, the Fed came out indicating that even more rate hikes may be on the way on the 26 September rate meeting. So, the expectations surprised the markets even further and the USDJPY pair was bought more after the market absorbed the information. See the chart below again illustrating this point.
Exness strongly recommends that all traders study the economic data points. If your portfolio hasn’t been rising at the rates you’ve been hoping for, this strategy should give you added traction.
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