By Sam Evans, Co-Founder and Lead Coach
When we are speculating in today’s markets, it is easy to think that studying economic data and paying attention to fundamental analysis is vital to success. After all, why wouldn’t we want to make sure that we were aware of anything that could affect the price of our investments? However, after a little time in the FOREX markets, we soon learn that often the news doesn’t lineup with the price action, leaving us with frustration and confusion.
It is widely thought that because all FOREX traders get the news at the same time, this makes it somehow a more level playing field but, this is not the case. Let’s be sensible for a moment and ask ourselves the question: do the major banks and funds really make their major decisions by using the same information as retail investors do? In fact, it is more likely that they have access to superfast news terminals allowing them to pull the trigger on a trading opportunity way ahead of the rest of us. Inevitably, this leaves most retail FX traders trailing behind the big boys and scratching their heads in frustration. This is one of the many reasons why I ignore the news and trade the price action in front of me.
If you take the time to develop an unemotional approach to speculating in the global currency markets, you will find that your trust in that system will grow and your need to follow and attempt to understand the news will fade. This is why StockAbility focuses on price action trading above all else. In the IncomeAbilities course, we use a methodology to find market turning points based on the patterns of price, highlighting evidence of major supply or demand at Retail and Wholesale areas.
A great example of this can be found in a live trading session I was holding with a group of my students around a major news announcement. This was an important day on the economic calendar, as the federal funds for interest rates were being published at 2 PM Eastern standard time. See the figure below:
While many analysts were expecting the Federal Reserve to hold interest rates at 2.5%, it is not uncommon on a major piece of news like this to see the dollar and other currencies react in a volatile fashion. These instances often cause problems for uneducated FX traders but on the flip side, they also create wonderful trading opportunities for those with a solid plan.
Around three hours before the statement we set up to low-risk high reward trading opportunities ahead of time. One was on the EURUSD with a short at an established retail sell zone and the other was also a shorting opportunity at an equivalent retail sell zone, this time on the GBPUSD pairing. Look at the screenshots below of the live trading room in real-time, when we set these trades up:
Ironically to the untrained eye, both markets were in uptrends at the time which suggested prices were going to go higher. However, our strategy suggested the opposite, with major selling leaving clues at the predetermined sell zones. This is where we placed our orders to sell the pairs, with a tight stop loss just above the zones, in case we were wrong and a profit target farther down for a generous risk to reward ratio if hit.
The beauty of setups like these is that they can be set up ahead of time, with all the components of the stop, entry, and target placed in the system, allowing us to remove emotion and let the plan fold out either way. Here are the results as they happened:
We must always realize that news is called news because it has already happened. News reports only explain what happened in the past. As traders, we need to predict what is going to happen in the future and news cannot do that. Learn to play the probabilities, manage your downside risk and develop a consistent, simple rules-based approach and you will soon find that you’ll be able to focus on the one thing that matters above all, which is price itself.
Be well and take care,