Some Follow Up Questions:
1. How far would you look at the data? In this case, after we know the fact that deviation is -0.1%, do we look at the the recent (historical) -0.1%? Or do we look at several data points that has same result in the past? What would be the profitable way?
2. You said “The market wanted to be in covering their long dollar positions, so used any dips in EUR/USD and GBP/USD and AUD/USD, etc to cover their short trades.”. Can you help point out specifically which article that you look at? I look for Bloomberg and Oanda news but haven’t found it. Looks like I missed theme of the day.
3. What is your approach to the preparation of news trading? Do you prepare it on weekend for that whole week of upcoming news or only on end of day?
1. I would prefer to only look at the historical releases for the past 6 months or so to help determine what the potential deviations from forecast can cause various sized movements. I don’t like to look back 1 year or 2 years ago, because that economic data that was released occurred probably in a different macro environment, so the market may not respond in a similar fashion in today’s market environment. The recent ones over the past few months are closest to the current macro environment, but even those are susceptible to changes in market sentiment, and market positioning.
I have heard of some big hedge funds such as Bridgewater Associates, etc having access to data and computers where they can play out all these scenarios and economic data in the past and see how the market responded, etc. Personally, I prefer the manual way I have shown you in the Mastery Course, because it just makes a lot of sense to me, and I can see with my own eyes the market impact and the shifting expectations and scenarios and I type the daily habits, etc it gets imprinted in my subconscious.
The problem with the GBP CPI y/y release is that over the past 7 months or so, it usually comes in at the forecast number, so you don’t have that many deviations to see the impact.
One of the approaches is to see the deviations of the past months and see what the news impact was.
So for the GBP CPI y/y, you have the past three readings:
July 16, 2013: -0.1% deviation GBP/USD: -55 pips Fm, -9 pips over next few min, then NS
June 18, 2013: +0.1% deviation GBP/USD: +20 pips / -20 pips WHIPSAW
May 21, 2013: -0.2% deviation GBP/USD: -22 pips Fm, then down sent shift for another -77 pips rest of day
Does this mean that going forward, every single time the CPI y/y comes in -0.1% below forecast, the GBP/USD will -55 pips FM, -9 pips over next few min, then NS? No. Nothing is perfect, and nothing works all the time
What it does do however, is give you good data to work with. Data that most traders don’t know about and don’t have.
Going forward, an upside +0.1% deviation doesn’t seem to be trade able because it is a whipsaw, and you want to avoid whipsaws at all costs
A -0.1% deviation can potentially be trade able, if the news spike is small. If a -0.1% deviation generates 60 pips of total bearish GBP order flow, then if the news spike is 50 pips FM, then there isn’t much room for a trade. On the other hand, if the news spike is only 15 pips FM, then there is potential room for a trade.
Looking up recent historical data about how the market responding to the news and deviations from forecasts is one of the principles of preparing for the news releases.
However, I would caution that it is not a perfect system, because there are things such as shifting market sensitivity due to global macro changes, as well as market positioning factors to take into account as well and stops/barriers as well. If the GBP/USD was already down 100 pips for the day and blown through key downsides tops, then a -0.2% deviation may only cause a FM spike, with the market not sustaining it, due the oversold nature of the market going into the news report, etc. So things such as sentiment, market positioning and stops/barriers can play a role at time.
Also, I wouldn’t just limit yourself to trading the GBP/USD for GBP news releases. There are other currency pairs that can provide a better reward/risk ratio.
For example, if instead of shorting GBP/USD for the CPI y/y release, you went long EUR/GBP or shorted GBP/CHF, you would have either profited a little or gotten out at break even.
The market on July 16, 2013, was not conducive to going long the USD.
2. Why wasn’t the market conducive to going long the USD?
I don’t think there was one specific article or line on the Oanda news that spelled it out for someone. I noticed a pattern or things. Firstly, there was Bernanke’s dovish remarks last week that sparked the big dollar selling on July 10. Then there was the higher US unemployment claims on July 11. Then July 15, the retail sales came in worse than expected. Even though these things didn’t cause the USD to sell off another 300 pips and cause EUR/USD or GBP/USD to break the highs on July 10th, they can provide bids on any dips.
If you are engaged in some tactical intraday trading, then there is a big difference between shorting at the lows of the range, versus shorting at the highs of the range, depending on the proper macro model. Lets say someone was bearish on EUR/USD or GBP/USD on July 16, 2013. Lets say you are coming into the day bullish the dollar for whatever the reason. There is a big difference between shorting GBP/USD at the 1.5050 lows, versus shorting GBP/USD at the top of the range at 1.5200 or waiting until topside stops above 1.5200 are tripped.
When I talk about the range, I mean the rough support and resistance points for the past few days since July 10/11th or so until today. By shorting at 1.5050 after it has already dropped 50 pips, you risk the bearish macro suffering from macro exhaustion and short covering, especially if it doesn’t have a sufficient bullish USD catalyst or sufficient GBP bearish catalyst. If on the other hand, someone shorts the top of the range, then you can potentially get the benefit of there being macro exhaustion of the bulls and for the market to drop and snap back into the range.
Same thing for the EUR/USD or AUD/USD, etc over the past few days. If you tried shorting them after a 40-50 pip intraday drop has already happened, that didn’t work out so well. If on the other hand, you shorted them at the top of the range, or waited for the topside stops to get tripped first, then faded them, you did better.
Various other things occurred that showed the sensitivity of the market. The EUR/USD was shrugging off wave after wave of bad news such as French downgrade, EFSF credit downgrade, etc. The AUD/USD engaged in short covering after the China data didn’t come out as bad as the market expected on Sunday. Then there was more AUD short covering after the RBA meeting minutes, etc. So there were some sensitivity signs not to try to short EUR/USD, AUD/USD, etc aggressively. And that carried over into GBP/USD as well.
Also, if the worse US data over the past few days caused the market to believe Bernanke speech today would be dovish, then that would have been another reason to sell the USD on July 16, 2013, etc.
So part of it is putting the pieces together.
3. Usually I prepare the day before. But there are times I want to look at the week ahead and get a broad overview of some of the news releases that can impact the market over the next week.
I know I wrote a lot, but I wanted to express all the thoughts that flow through my mind when I am analyzing things. Was it a bit too much?