Forex Event Trading

With all of the major news events coming up in the month of September, I thought it appropriate to post Darkstar's short forum post on event trading. You can find it here: http://www.darkstarforex.com/Blog/tabid/200/entryid/188/Event-Trading-is-Easy.aspx    - and  make sure to check out the rest of his blog. It's an excellent source of FX education.

Aug 20, 2006

Quote:

""Originally Posted by jlowder:
Having never actually seen a news release I'm curious as to how this works. Do the reports simply state the numbers upfront, like what we see on the calendar here? And if thats the case, isn't it a pretty cut and dry method of deciding if the price will go up or down? I mean, once you determine higher than expected numbers raise/lower the price for one news event, wont' that always be true?

Or is it more involved than that? Given the response time to news releases I would think that it would have to be that simple?""

Event trading is much more involved then that. Depending on how the numbers print in relation to expectations, the pair can treat the same miss in different ways. At one point, below consensus inflation numbers can indicate a moderating of inflation. At another it can mean a recession is brewing. Yet again it can mean nothing at all.

To start with, an understanding of economics and the effort to track long strings of different data points are required to make the determination which is the case. Then a wealth of research needs to be dedicated to discovering how much of a number is actually priced in. It is rare that the “consensus” numbers are the ones the market is priced for and making that determination is complicated. Most of the data is anecdotal in nature (sentiment and feel) or messy (pre announcement order flow). All of the whipsaws you have ever seen are a result of pre-priced data. Unless you know this info, you’re in for a beating at some point.

Then there is post announcement trade management. Tech analysis is useful, but a deep understanding of order flow is critical. You have to make certain assumptions about how much of the open interest has been pulled because of the data, where new interest will be growing, and ultimately how you should expect to position your own stops and take profits as a result. Classic trader rule #3 is “cut your losers and let your winners run” and it holds just as true for event trading as is does for trend systems. Someone may be content with a fixed 10-50 pip profit, but they are either leaving a fortune on the table or needlessly risking all they have made. Numerous 2, 3, and 400 pip moves have been sparked by a single news event this year alone…

News trading is ridiculously profitable if you know what you’re doing. What disturbs me is that the current crop of event traders all think this can be distilled down to a simple 2 order bracket system. The current sentiment is that brokers and market makers are all stupid. Consensus says they are quite content to allow every Joe to extract millions from their pockets with little effort. Unfortunately sometime soon the hammer will drop and the forum will be running red with blood. It should never be forgotten that we are trading against a group of professionals that only get paid when we lose money. They have been at this game a long time and know how to lull the foolish into complacency. Once the leverage begins to tick higher (which it no doubt is currently) a little price or spread manipulation will recover all they have lost and a windfall profit as well.


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