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Tuesday, May 7, 2013

Fundamental trading: BOA rate decision



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.

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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.