A Trading Strategy

Watching an opportunity pass you by is a frustrating experience. Missing a volatile period over the time of an economic data release is one such time.

A Strategy for trading over Economic Data

This can be extremely profitable but requires extra work, diligence and experience. The improved ATR (Average Trading Range), which can be up to forty times higher than normal, during this period brings its own rewards.

Use your experience or your gut!

Using your gut means trading what you see on the screen by way of information not on your chart. Your experience will say “chart” and unless it is totally opposed, trading over numbers means gut!

Gut: Opening a trade in accordance with the fundamental data that has just appeared and in line with its direction.

Experience: The technical way where we open a position expecting a breakout from range of volatility from last 2 hours before publication.

It is not more or less “sexy” to go with your gut it is often more rewarding but always more risky.

The first option is extremely difficult to apply for an individual investor unless the position is to be long term.

However, if the the trade to be opened in response to data, the behavior of instrument is often too violent for the trader to analyse the data.

Large financial institutions set automatic orders and their reaction for data takes less than a second. Therefore, this type of trading is impossible to use by individual traders without using a gut instinct and that comes with experience and many months if not years of seeing reactions.

In contrast, the second option is more practical. The principle is similar to break out from the channel which we have discussed discussed before. You need to determine the maximum and minimum points from the last two hours and set two orders BUY and SELL STOP. Both contracts are so-called breakout orders which will be opened at worse price than it is at the moment.

Rules for trading the macro data:

• Select the market and the data which will be published.
• Check the historical data chart to understand the past reactions to this data.
• Before publication find variation channel, may be the last 2 hours. Is possible, marry this to previous price action when this data has been released.
• Place BUY STOP and SELL STOP orders several seconds before the time of announcement of the data.
• Set levels of SL at opposite ends of the channel or close the position when the first breakout proves to be false.
• Set a trailing stop after start of the move, or close position manually when you sense that the momentum is weakening.

Issues to be borne in mind:

• The Range of motion after breaking out will be too small and after opening the position price returns inside of the channel – the only solution is to close the position. And live to fight another day
• Price returns inside the channel and breaks out in the opposite direction. This can happen so be careful to not accidentally activate the order. It’s better to place the pending order a few pips further from the channel if prior to the publication of data trading is too close to one of the lines of the channel.
• Liquidity of the market is thin and the price at which pending order will be opened will differ significantly from the expected. This shouldn’t affect a reputable broker but avoid illiquid markets and trade mindful of the principles of capital management. If we plan a possible loss of no more than 2% of capital even slippage in the purchase which can mean sometimes a doubling of losses will not be tragic for the trader.
• The data is in line with forecasts and nothing develops. Immediately withdraw the orders, because the movement which was awaited did not occur.
• Broker strongly increases the spread over the data. Check brokers normal behaviour over numbers. Consider changing brokers if dissatisfied

Examples of trading on macroeconomic data on EURUSD

At the ECB meeting on 22 October, Mario Draghi stated that the bank is determined to take all steps to encourage the depreciation of the EUR. As you can see in 30 M chart the impulse amounted to more than 100 pips in the next few hours and the downward movement continued.

At the time of Payrolls data on 2 October 2015 . The data was appreciably worse than expected which resulted in a huge shot drop of 150 pips in just 10 minutes. While previously the ATR (average true range or medium range of motion) was 5 pips in 5 minutes. Here it was 30 times greater.

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