Forex From A Different Perspective

Firstly, I would like to say a very sincere thanks to every reader who took the time to vote for my fellow trader, Rick Wright, and I in the recent FXStreet Forex Best Awards. Our article won the Best Educational Content Award for the 3rd year now and it is a great honor to win once again. Many thanks to you all.

This week, I would like to discuss a recent economic news event which occurred on Feb 2nd, namely the RBA Cash Statement for the Australian Dollar. As you may know, FX traders worldwide tend to work themselves into a frenzy when it comes to major economic news, especially when interest rates are concerned. They sit by their computer eagerly awaiting the news to be released and then attempt to guess which way the market is going to move based on the numbers. Let’s say, it is not for the faint-hearted! Yet who can blame them when every major currency broker and textbook on trading FX tells people to trade the economic news in FX because it is fair and transparent and it gives you a level playing field to trade the news as it comes out.

You then try that in real life and things suddenly do not seem quite as fair. You scour the news websites looking for the latest data figures as they come out, clicking the refresh button on the web browser so as to get a glimpse of the numbers only to watch the market move away from them. Another option is to simply wait for the price to start moving before doing anything and then try to jump on board for the ride as it happens, hopefully catching the momentum in time to make a quick return. Again, this tends to pay off on the odd occasion but never consistently enough to make a real strategy out of it. Most of the time, news traders find themselves getting stuck with a ton of slippage and frustrated as the market gives many false signals. Let’s take a look at the aforementioned example of the AUDUSD currency pair as it had the all-important interest rates announcement recently:

The actual figures stated that the RBA wanted to hold rates where they were; this information was released at 3.30am on Feb 2nd. Now, for a start, it is impossible to determine which way prices are going to go when the rates are being held at the same level, so any guess on direction going up or down is nothing more than that, namely a guess. As we can see form the chart above, in the first 5 minutes of the economic news being released the AUDUSD spiked up violently, only to then reverse and drop almost 100 pips lower throughout the rest of the trading day. If you had been a news trader in this case and clicked the buy button at market as the news event came out and the market started to rally, you would have likely been filled at a pretty poor price with some nasty slippage. This is one of the downsides to using a market order as it will always fill you at your price, or likely potentially worse, in a very volatile market. How then would you feel buying at the high price only to watch the price fall rapidly to the downside?

Another perspective is to think and act like the major banks and institutions instead. Ask yourself what they were doing at this time? Do you really think that they were waiting for confirmation or do you think they already had a plan? Do most businesses have a plan? In fact, maybe they had already been attempting to sell the AUD a few days prior and not gotten all of their orders filled, resulting in an imbalance of sellers and buyers, thus creating a supply level? Take a look at the screen shot below:

Notice how price rallied from the economic news announcement straight into the level of supply, where the banks were originally selling the AUDUSD. Price moved sharply up but could not breach the level of unfilled orders and came crashing back down for a drop of almost 100 pips. The major difference between the novice news trader approach and the professional institution approach is that the former like to chase the opportunity while the latter allow the opportunity to come to them. Who, therefore, takes on the lowest risk and higher overall reward?

Since this event the AUDUSD has gone on to rally much higher, causing even more frustration for the people who bought it high hoping to see it move higher still. They endured a loss on the trade, only to be proven right on the direction much later and have only a loss to show for it. Proper trading is about knowing your entry, stop and target ahead of time and using these rules to approach the market systematically. The idea of Market Timing is alien to many but logical to a few. In two weeks we will explore the concepts of Market Timing further and its application in the world of FX.

Be well and thanks again for your ongoing support.

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