Fundamental events always cause a lot of volatility
in foreign exchange markets. Interest rate decision events are above the rest
as they are key currency drivers both short and long term. Markets often stall
and fall into ranges days before these key releases and right after they come
out huge moves start. Be aware of that. Of course, general public might be
wrong regarding interpretations of these pieces of news, so it is crucial to
follow smart money and not be led by emotions of greed and fear. Anyway, if you
know how to take advantage of the news trading you can make nice cash in the
long term. Let us look at how you could have traded BOA (Bank of Australia)
rate decision today and try to speculate whether it will have long term impact
or not.
You can also watch a video on how you could have traded Bank of Australia rate decision:
Also read related articles when you have finished this one:
Since I have moderated my trading news method
slightly I did not trade the event. I did expect Australian dollar to rise
after the release, but the Central Bank of Australia decided to surprise traders
by cutting interest rates. Technically, yes you could see strong demand for
British Pound, Euro and other currencies and strong supply of aussie all along.
I guess that was the sign for technical traders that smart money knew what the
BOA is up to and were buying into the event.
Although, I did not trade the event I want to
quickly show you how you could have taken a trade (or trades) in gbp/aud and
eur/aud made nice profits. I like these aussie crosses most as they are the
most volatile and travel biggest distances when the breaks happen and big moves
start. So, let us see how you could have taken a breakout trade in these two
pairs.
First, eur/aud. Just before the news the pair was
fluctuating in a small range of 1.2744-1.2777. This gave us an area for entry
and exit. For a buy you would have placed a buy stop order a few pips above
1.2777 level with a stop below the range of 1.2744 (possibly 1.2740). That
would be a stop of forty pips. You should have also placed a take profit target
at previous high of 1.2885. I like exiting at previous highs when I buy and
previous lows when I sell. So, the news came out and market exploded upwards
and reached the target in 7 hours. A little bit over 100 pips of profit! I
would say that is a very good risk reward ratio!
Now, if you wanted to place a sell order just before
the news came you simply had to reverse the above mentioned order. You had to
place a sell stop below 1.2744 level and stop loss order above 1.2777 level.
Then define a take profit target that would have been around 1.2600 level,
possibly a little bit higher (1.2610 as I like exiting ten pips before even
number). Since the market went up you simply had to remove your sell stop when
your buy order was opened and concentrate on your long trade.
Let us look at how you possibly could have traded
gbp/aud pair during the event. Just before the news (3 hours) the pair was
fluctuating in a range of 1.5189-1.5161. It means you should have placed a buy stop above the high of the range
(1.5189) with a stop loss below the low of the range (1.5161). What about an
exit? One way was to exit at previous high (1.5233). Another one was to exit at
mid-point number of 1.5250. Of course, you could still keep the trade, but as
you may see you would have lost most of your profit by now.
What if you wanted to place a sell order? Just
reverse the process. Your sell stop order should have been at 1.5161 (a few
pips below it) and your stop had to be a few pips above the high of the range
at 1.5189 (possibly 1.5195). The most logical place to exit your trade would
have been at an even number of 1.5100 (ten pips above that). When you saw that
the news was bearish for aussie and your buy stop was triggered you simply had
to remove the sell order and ride upwards with the market.
Looking at the price action now you can also see
that these kind of trades can have very short term impact and market may
reverse in a few hours, possibly in a few minutes. However, I still find news
trading a good way to make extra money with my swing trading strategies.
Ok, I will finish on this happy note. Be sure to
read related articles to learn more on my news trading method. I promise to
expand on this in my future posts.
I hope you benefited from the post. If you liked the
post I would also be happy if you gave a plus on Google+, tweeted, liked it on
Facebook and other social platforms. Have a nice day.
Vytas.
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.