Chapter 25, Part II. Buying and Selling the News. Page 9

Second strategy – fast hands trading

The core of this trade is the same as for the first one – it’s still “occasional”. At the same time there is an important difference – you enter not prior but after the news release. The major task for you here is to assess surprise. The faster you will assess it – the more pips you will earn. Since you will know the direction of surprise – you also will know the direction of entering long or short. Here is just two preparations should be made before release:

1. The same work with target estimation;



2. Some (surprise level)/(potential move) ratios that will let you assess target properly. For instance, you may estimate how the market reacts on different value of surprises based on historical data. As a result you should have for every major data table like that – 10% surprise – 30 pips move; 20% - 50 pips; 30% - 65 pips; 50% or higher – 120 pips.

3. Then you have to calculate, potential values of, say NFP that will correspond to these surprises. This is necessary for fast reaction of real data. For example, let suppose, that consensus forecast for NFP is 80K. You now that 20% surprise is 96 K, 30% - 104K and 50% - 120K. So, if actual the NFP will release at 115K you will be able to quickly assess that the probable move will be at least 65 pips. If you will start to calculate right at release time – you will miss whole move. All numbers are occasional, just for illustration.

4. When you see actual numbers, you know in what direction to enter – just pull the trigger and track your position. Place a stop-loss order. Close the position when your profit will reach the number approximately that is in your surprise scale sheet.

Pipruit: Aha. But sir, if we will look at our charts #3 and #4, we see some confusing price action. You’ve said that actual NFP was 1.5 times better than expected, so this was a solid upward surprise. So we could count on downward move and should enter short. But the market has shown strong upward move…
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Commander in Pips: That’s right. But still, after that market has worked out this surprise in a way how it has to. Still, you’re absolutely right – that is a major risk. You never know if there will be an opposite move before the moment when the market will start to move according to the surprise or not, and how strong it will be. So this is some kind of mastership and more a art than a science. To take some pause right after release, or not? Or pull the trigger fast?

Still when data has already come out you know the surprise direction and in most cases, despite on possible preliminary opposite move due position closing, the market will outwork this surprise. When to enter, how to enter – this is some kind of knowlege that comes from experience.

Also be extra careful, since during some US data there could be other countries releasing data that could skew the effect of a surprise from US. You have to take into consideration all aspects.

So, that is all about news trading – choose your poison, son.



P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.


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