Trading the News Strategies - Directional Bias

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Introduction

All traders and investors, whether fundamental or technical, should be aware of how disasters, economic releases, consensus and company news are going to affect their positions.  Many things can affect your trading day, which in turn change the long term direction of economies, company profits and therefore your trade bias.  Every day economic data is released by governments, companies and institutions on GDP, earnings, employment, government debt, inflation, trade and housing to name but a few.  All of these 'numbers'  can affect your open positions and change market sentiment.  Even though we are technical traders, understanding these fundamental issues will allow us to form our strategy in the long term.  News is the fuel of the markets!

We're not going to drill into what GDP etc... mean, but we will look at how the main ones affect us.  For more info on these definitions and what they mean to the economies of the world as a whole I'd recommend looking at CNBC, Bloomberg etc... or tradingeconomics.com for up to date stats - there are many resources out there that explain these economic terms. 

How to Trade the News

There are two ways to trade news:
  • Directional Bias
  • Non-Directional Bias
Directional Bias

The first thing to remember is, only trade the news that will move the markets.  The forexfactory.com will give you guidance here, or see our next section on The Best News Reports to Trade.  

With Directional Bias traders expect the market to move in a certain way after the news release.  Analysts and forecasters disclose their thoughts on what the economic release, company release etc... may be.  Many analysts will publish their numbers and a consensus will be formed, which may or may not match the actual release.  This is called Consensus versus Actual.  

It's not that easy though, as the market will often move on the consensus, meaning if the actual matches the consensus then the market may not move at all on the release date... Or, if the actual deviates from the consensus, there may be a sudden move.  This is called 'buy the rumour, sell the news'.  Most markets will move on the consensus (instigated by large investment houses) and only deviate from their bets if consensus doesn't match the actual move.  You may find that if you react on the news, it is often too late.  Markets are sometimes caught unaware and consensus may be totally wrong.  Market Rally's and sell-off's can be the result.

Trading Directional Bias

Let's say we're taking a position based on an unemployment release in The USA.  First we need to look at the trend prior to the published figures.  If the American unemployment rate has been steadily falling month on month over the last year, we can predict that it will fall further this month.  All things being equal, if the unemployment rate decreases then the USD will appreciate against a basket of other currencies.

We decide to trade EUR/USD on this news. As the unemployment release gets closer we can start to look at the range the EUR/USD pairing is trading in. Let's look at the EUR/USD chart below for our set up.

EUR/USD - Directional Bias Trade Example

Since we think The USD will appreciate against EUR, we must short The EUR/USD (as EUR comes first in the pair).  We've established our range prior to the release and think USD will appreciate against The Euro, therefore our breakout will be the Lower line.  Entry will be a few pips below this breakout line and a stop/loss will be placed just above the breakout line, or wherever your strategy suggests, i.e above the last periods candle, just above upper breakout, etc...

We set our target 25 pips from the below breakout - our range height.  Now we wait for the data release.  Either it will go in our favour or against us, i.e. Unemployment will decline above consensus, or unemployment will increase.  If the trade goes for us, our entry point will likely trigger and if the trade goes against us we won't enter the market (no harm done).  On entry to the market we need to manage our trade until it meets our target.

Now this is only one system and there are many out there. You'll need to test your system vigorously before trading. Also, in the above example we may find that the trade goes for us at first, only to suddenly whipsaw back stopping us out. So make sure you're aware of the risks before trading.

The key to directional bias is - you must truly understand the concepts behind the news. If you don't understand what effect it can have on particular currencies, then you might get caught up in some bad setups.  For more understanding on how releases affect your positions visit https://www.forexfactory.com.  This site will give you details of all the imminent releases and what they mean for your trading day.

Non-Directional Bias

In this instance traders don't care which direction the market will go, as long as it goes somewhere.  This might be part of an overall non-directional bias strategy.

Trading Non-Directional Bias

You should only trade the releases that will move the markets.  Forexfactory.com will give you guidance here, or see our next section on The Best News Reports to Trade.  Trading non-directional bias works in the same way as the above directional bias trade, but both ways.  This is called a 'Straddle Trade' where both upper and lower breakout points will be your entry triggers and your stops will be just above the lower breakout for the 'short' trade and just below the upper breakout for the 'buy' trade.

Both these trade set-ups take the emotion out of trading and come in various forms.  I've shown you the basics, which will be part of most set-ups.  Beware, these directional and non-directional trades don't always go your way.  You may hit the trigger, but the target may not be reached.  

Costs of Trading News

On big news events the markets become volatile and news affects different markets in different ways.  During big news events the cost of trading may increase as brokers can put their spreads up temporarily.   This obviously increases your costs which will affect your position size and total profits.

Another cost to you (the trader) may be that your 'play' on hearing the news doesn't get executed on time, losing you money.  This is called 'slippage' - you enter the market at a certain price, but due to volatility and the high number of orders going through the system you end up getting a worse price.  You may also get 'locked out', meaning your trade did get executed at the right time, but it may take a minute or two for it to show on your screen.  This means you can't trade this position during this 'lockout' time.

Another consequence of big news events is 'whipsaw'.  Here the market takes off in one direction on the news, only to double back on itself and shoot off in the other direction.  All of these drawbacks mean you must incorporate them into your overall strategy and to reduce risk make sure you trade liquid markets.

To Sum Up

The main things to remember from this section are:
  • When you have a directional bias, you are expecting price to move a certain direction, and you've got your orders in already.
  • It is always good to understand the underlying reasons why the market moves in a certain direction when news is released.
  • When you have a non-directional bias, you don't care which way price heads.
  • Remember the costs and incorporate them into your strategy.
Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

More...


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Introduction

All traders and investors, whether fundamental or technical, should be aware of how disasters, economic releases, consensus and company news are going to affect their positions.  Many things can affect your trading day, which in turn change the long term direction of economies, company profits and therefore your trade bias.  Every day economic data is released by governments, companies and institutions on GDP, earnings, employment, government debt, inflation, trade and housing to name but a few.  All of these 'numbers'  can affect your open positions and change market sentiment.  Even though we are technical traders, understanding these fundamental issues will allow us to form our strategy in the long term.  News is the fuel of the markets!

We're not going to drill into what GDP etc... mean, but we will look at how the main ones affect us.  For more info on these definitions and what they mean to the economies of the world as a whole I'd recommend looking at CNBC, Bloomberg etc... or tradingeconomics.com for up to date stats - there are many resources out there that explain these economic terms. 

How to Trade the News

There are two ways to trade news:
  • Directional Bias
  • Non-Directional Bias
Directional Bias

The first thing to remember is, only trade the news that will move the markets.  The forexfactory.com will give you guidance here, or see our next section on The Best News Reports to Trade.  

With Directional Bias traders expect the market to move in a certain way after the news release.  Analysts and forecasters disclose their thoughts on what the economic release, company release etc... may be.  Many analysts will publish their numbers and a consensus will be formed, which may or may not match the actual release.  This is called Consensus versus Actual.  

It's not that easy though, as the market will often move on the consensus, meaning if the actual matches the consensus then the market may not move at all on the release date... Or, if the actual deviates from the consensus, there may be a sudden move.  This is called 'buy the rumour, sell the news'.  Most markets will move on the consensus (instigated by large investment houses) and only deviate from their bets if consensus doesn't match the actual move.  You may find that if you react on the news, it is often too late.  Markets are sometimes caught unaware and consensus may be totally wrong.  Market Rally's and sell-off's can be the result.

Trading Directional Bias

Let's say we're taking a position based on an unemployment release in The USA.  First we need to look at the trend prior to the published figures.  If the American unemployment rate has been steadily falling month on month over the last year, we can predict that it will fall further this month.  All things being equal, if the unemployment rate decreases then the USD will appreciate against a basket of other currencies.

We decide to trade EUR/USD on this news. As the unemployment release gets closer we can start to look at the range the EUR/USD pairing is trading in. Let's look at the EUR/USD chart below for our set up.

EUR/USD - Directional Bias Trade Example

Since we think The USD will appreciate against EUR, we must short The EUR/USD (as EUR comes first in the pair).  We've established our range prior to the release and think USD will appreciate against The Euro, therefore our breakout will be the Lower line.  Entry will be a few pips below this breakout line and a stop/loss will be placed just above the breakout line, or wherever your strategy suggests, i.e above the last periods candle, just above upper breakout, etc...

We set our target 25 pips from the below breakout - our range height.  Now we wait for the data release.  Either it will go in our favour or against us, i.e. Unemployment will decline above consensus, or unemployment will increase.  If the trade goes for us, our entry point will likely trigger and if the trade goes against us we won't enter the market (no harm done).  On entry to the market we need to manage our trade until it meets our target.

Now this is only one system and there are many out there. You'll need to test your system vigorously before trading. Also, in the above example we may find that the trade goes for us at first, only to suddenly whipsaw back stopping us out. So make sure you're aware of the risks before trading.

The key to directional bias is - you must truly understand the concepts behind the news. If you don't understand what effect it can have on particular currencies, then you might get caught up in some bad setups.  For more understanding on how releases affect your positions visit http://www.forexfactory.com.  This site will give you details of all the imminent releases and what they mean for your trading day.

Non-Directional Bias

In this instance traders don't care which direction the market will go, as long as it goes somewhere.  This might be part of an overall non-directional bias strategy.

Trading Non-Directional Bias

You should only trade the releases that will move the markets.  Forexfactory.com will give you guidance here, or see our next section on The Best News Reports to Trade.  Trading non-directional bias works in the same way as the above directional bias trade, but both ways.  This is called a 'Straddle Trade' where both upper and lower breakout points will be your entry triggers and your stops will be just above the lower breakout for the 'short' trade and just below the upper breakout for the 'buy' trade.

Both these trade set-ups take the emotion out of trading and come in various forms.  I've shown you the basics, which will be part of most set-ups.  Beware, these directional and non-directional trades don't always go your way.  You may hit the trigger, but the target may not be reached.  

Costs of Trading News

On big news events the markets become volatile and news affects different markets in different ways.  During big news events the cost of trading may increase as brokers can put their spreads up temporarily.   This obviously increases your costs which will affect your position size and total profits.

Another cost to you (the trader) may be that your 'play' on hearing the news doesn't get executed on time, losing you money.  This is called 'slippage' - you enter the market at a certain price, but due to volatility and the high number of orders going through the system you end up getting a worse price.  You may also get 'locked out', meaning your trade did get executed at the right time, but it may take a minute or two for it to show on your screen.  This means you can't trade this position during this 'lockout' time.

Another consequence of big news events is 'whipsaw'.  Here the market takes off in one direction on the news, only to double back on itself and shoot off in the other direction.  All of these drawbacks mean you must incorporate them into your overall strategy and to reduce risk make sure you trade liquid markets.

To Sum Up

The main things to remember from this section are:
  • When you have a directional bias, you are expecting price to move a certain direction, and you've got your orders in already.
  • It is always good to understand the underlying reasons why the market moves in a certain direction when news is released.
  • When you have a non-directional bias, you don't care which way price heads.
  • Remember the costs and incorporate them into your strategy.
Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

More...


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