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Trade the News

Fri, Aug 18 2006, 09:58 GMT
by Scott Owens

FX Engines

Most traders intuitively know that major news events drive FX price action, but few trade the news proactively. In fact, most traders avoid news events simply because they lack the tools and information needed to trade the news effectively. Now, the introduction of a toolkit specifically designed to trade the news makes a new, compelling method of trading available to FX traders for the first time.

Analysis

• Understanding the drivers of price action
• Context: the most critical element of any trading system
• Targeting news event driven price action
• Automation as the key element of any news trading approach
• Why trading the news is actually a conservative strategy
• See recent sample trades with charts

Action

• Trade the news with FX Engines!
• Get familiar with the FX Engines Trade the News Toolkit

Related material

Test-drive FX Engines for free online at www.fxengines.com to see the power of trading the news first hand.

About this report

The Forex Report is a periodic publication that investigates strategies for superior trading performance in the foreign exchange markets. These reports utilize advanced statistical and econometric modeling techniques to create new insight into the trading strategy of the average trader. This report, Trade the News, is a general report intended for all audiences, including those new to the forex market.

Analysis

All traders want an edge. In pursuit of that extra advantage, traders will pay thousands in training, subscribe to black-box signal services, and build trading systems using signals they barely understand. The desired end result is a system that can be used repeatedly for profits beyond those offered by traditional investment alternatives. Most traders fail.

To find out why, we dissected price data from the past five years and emerged with a single conviction: forex price action is driven by news events.

We learned that the systems most people use are fundamentally flawed, and we learned that most traders avoid the very thing that could lead to their success because of a lack of tools. This report exposes the reality of trading the news: the empirical, analytical support for the concept and the introduction of a new set of tools from FX Engines specifically designed to extract profits from these amazing price moves.

Drivers of price action

From a distance, market action in the forex markets represents pure chaos. One minute the market can be completely flat while another can witness 10-pip tics in both directions. Prices can trade in a range for months, then suddenly jump out into a major trend lasting equally long. What drives it?

To understand the drivers of price action one must understand the participants in the market. The world’s daily FX volume is created by a myriad of constituents: governments, banks, corporations, investors, traders, et al. Each of these constituents brings with it certain goals for their participation, and each brings a transaction volume. The sum of these goals and their corresponding volume is the price action seen each day in the markets.

At the most basic level, foreign exchange rates are derived from long term economic fundamentals. These variables measure and weigh the value of one currency vs. another. Think of these economic fundamentals as the tide, ebbing and flowing over time. Indeed, these macro-factors can lead to the very long term trends we see in weekly and monthly charts.

Go a little closer to the surface and you will see a variety of price action driven by governments protecting their currency, corporations and banks transacting true currency swaps, and traders speculating according to differing timelines and investment goals. Each of these constituents can cause price action that goes with the tide or against it, depending on their market power at the time of their transactions.

At the very surface level we have a constant hunt for equilibrium. The market wishes to always have a complete, correct value for the exchange rate for two currencies, but it does not always have complete, correct information. The passing of inflection points and, more importantly, major economic news events, gives the market the information it needs to re-evaluate exchange rates and make instant changes.

When the market receives this information, it quickly discerns the equilibrium gap and moves to correct it. This movement can be instantaneous and violent, moving 100 pips in minutes, or in a steady march of 40 pips to equilibrium.

Because these events are instantly reacted to by market participants with very large transactional power, these news events actually move the markets. Our Event Reports for the major economic news events demonstrate this emphatically: news is the driver of the forex markets in the short term.

This realization is important not only because it paves the way for a new kind of trading, but also because it shows why most trading systems used now are likely to fail.

In order to read the full report download the PDF file below.

• Download full Trade the News

Published on  Fri, Aug 18 2006, 09:58 GMT

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