This article written by Dr. Stefan Friedrichowski and Christian Stern was originally published in the September 2014 issue of Traders' Magazine.
Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.
The Trading Idea There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP) or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic price movements take place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage and use it for a real profit.
An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.”
This is absolutely true. There may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.
- Dr. Stefan Friedrichowski is physicist and full-time trader and manages the scientific work and the development of trading strategies and Christian Stern is full-time trader and heads the treasury and the education department at Trading Stars.
Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.
The Trading Idea There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP) or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic price movements take place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage and use it for a real profit.
An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.”
This is absolutely true. There may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.
Editors’ Picks
EUR/USD ticks north after ECB, US inflation data
The EUR/USD pair hovered around 1.1750 but is still unable to conquer the price zone. The European Central Bank left interest rates unchanged, as expected, upwardly revising growth figures. The US CPI rose 2.7% YoY in November, down from the 3.1% posted in October.
GBP/USD runs beyond 1.3400 on BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 area on Thursday, following the Bank of England decision to cut rates, and US CPI data, which resulted much softer than anticipated. The pair holds on to substantial gains early in the American session.
USD/JPY rises to near 156.00 ahead of US CPI data, BoJ policy decision
USD/JPY moves higher to near 156.00 in the countdown to the US inflation data. Fed’s Bostic sees inflation more worrying than the job market. The BoJ is expected to raise interest rates by 25 bps to 0.75% on Friday.
Editors’ Picks
GBP/USD runs beyond 1.3400 on BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 area on Thursday, following the Bank of England decision to cut rates, and US CPI data, which resulted much softer than anticipated. The pair holds on to substantial gains early in the American session.
EUR/USD ticks north after ECB, US inflation data
The EUR/USD pair hovered around 1.1750 but is still unable to conquer the price zone. The European Central Bank left interest rates unchanged, as expected, upwardly revising growth figures. The US CPI rose 2.7% YoY in November, down from the 3.1% posted in October.
Gold nears $4,350 after first-tier events
The bright metal advances in the American session on Thursday, following European central banks announcements and the United States latest inflation update. XAU/USD approaches weekly highs in the $4,350 region.
Crypto Today: Bitcoin, Ethereum hold steady while XRP slides amid mixed ETF flows
Bitcoin eyes short-term breakout above $87,000, underpinned by a significant increase in ETF inflows. Ethereum defends support around $2,800 as mild ETF outflows suppress its recovery. XRP holds above at $1.82 amid bearish technical signals and persistent inflows into ETFs.
Bank of England cuts rates in heavily divided decision
The Bank of England has cut rates to 3.75%, but the decision was more hawkish than expected, leaving market rates higher and sterling slightly stronger. It's a close call whether the Bank cuts again in February or March.
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