Methodology to trade the news in Forex (fundamental announcements)
By trading the news I don’t mean trying to guess what the first reaction of the market to the news announcement will be, because there is just no way of knowing this (and you know it). If you wanted to know this you would need to get inside every single trader head… it’s just impossible.
But if you wait a few minutes, see how the market reacts first, you might be able to take advantage of the second movement by following this advice.
And the best thing about this methodology, is that you don’t even need to know what the actual figure is, just do your homework (analysis), wait patiently, see how the market reacts, then make your move…
Now, I don’t trade the news, and I don’t recommend you to trade them, but I know I’m not going to change the way you trade just because I don’t recommend it, so maybe this information will be helpful.
If it is helpful, let me know at the end of the article.
Whenever we get a news announcement there are two possibilities: when it changes the sentiment of the market and when the sentiment of the market remains unchanged.
When the sentiment changes
Most of the time, the market will move in the direction of the general sentiment of the market, unless there is a big (really big) difference of what is expected and the actual number.
Under this scenario, the actual figure could even change the sentiment of the market. And it moves so fast, that it’s impossible to trade it.
Also, if you try to trade under these circumstances, you’ll meet Mr. Slippage, the worst enemy of the fundamental trader
So, when the market moves that fast, breaks through nearby S&R levels, the best thing to do is to wait on the sidelines, and forget about trading that particular currency pair.
When the sentiment does NOT change
Now, this is where trade opportunities arise.
Sometimes we get a good number, and the market goes down, right? And on some other times we get a bad number and the market goes up…
If you have been asking yourself the reason behind it (I did for years), I got an answer for you:
Because of the sentiment of the market, that’s it. Now you can retire.
When the market is in a bullish sentiment, it uses everything (well, almost everything) as an excuse to continue its way up, and the fundamental announcements are the perfect excuse…
The same happens when the market has a bearish sentiment, if there is an important announcement, it goes down, if someone says something about the market, it goes down…
That’s how it works.
And this is how you can take advantage of it:
Let me show you a recent chart of the CHFJPY, and focus on the red rectangle:
Earlier this week the Monetary Policy Statement and interest rate from the BOJ were announced.
Let’s pretend that we don’t know what they said (we don’t need to know it in order to profit from it).
The first reaction of the market was to go down, but then it stopped around the short term support level (green line).
Why did it stop there?
Because the sentiment of the CHFJPY is bullish, you can verify it by looking at your daily charts:
You can clearly see that the CHFJPY is in a bullish condition, it is likely to continue its way up and it will use any excuse to continue its way up, like it did earlier this week with the BOJ monetary policy statement.
So here is the methodology:
1 – Find the sentiment of the market
2 – Identify short term support and resistance levels
3 – If after the announcement, the market reacts to the short term S&R level, in the direction of the sentiment of the market, look for your entry.
And that’s it!
What do you think… it makes sense to me, what’s your take?
Let me know in the comment section.