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Wednesday, May 1, 2013

When market ignores fundamental events



Hi, again. I am glad to be back from my short holidays and continue writing about trading. Today I want to continue talking on the topic of news trading. The post will not be long, but I do expect it to be useful. I want to talk about a phenomenon of ‘ignoring the news’. It is a regular behavior of market movers to ignore good news and continue selling or ignore bad news and continue buying. In a trend this is a sign of a strong trend. In a range it is a sign that market will go in the opposite direction than the news should push it to. 

Example with eur/cad and Canada GDP data release

Let us take an example, so that it would be easier for us to understand the behavior of market ‘sharks’ that are not pushed by any news, but can deliberately push prices where they see them fit to go. On Tuesday, April 30th (2013) Canada GDP was scheduled to be released at 12.30 GMT. The number was expected to be better than previous month. And it did come better. To tell the truth it came better than expected. Most currency pairs fell to Canadian dollar. However, Euro, Swiss Franc and British Pound resisted. In fact, after about 15 minutes eur/cad went up for about 50 pips and cad/chf fell the same number of pips. gbp/cad basically stayed at the same level. How do you interpret this?

Market ignored good data from Canada in European currencies, because it was ready to buy them against all other currencies across the board. Market wanted to push European currencies upwards and it did just that. Now, how do you know what market wants and what it doesn’t? Well, you look how it reacts to fundamental data. That is a general principle how you should evaluate the short term tendency that market may about to develop. The data that Canada released should have pushed all currencies lower against loonie immediately. If it failed to it against some currencies pairs it simply means those currencies are backed up at the moment and you’d better sell CAD against these pairs. 

You had some 10-15 minutes after the release to make up your mind how to do it. I already had a pre-defined place for my entry, stop and exit for both pairs. However, I decided to trade only eur/cad pair for the event. I did not want to double my risk by trading both eur/cad and cad/chf, so I took only eur/cad. It usually covers bigger distances than cad/chf and this is primary reason why I prefer it to Franc pair.
Why did I look at these pairs in the first place and why I was considering selling CAD, not buying it? I talked about the methods that I used to be bearish in my previous post. I tend to look at technical structure of a currency pair before the news. If it looks bearish I only place a sell order. If it looks bullish I only place a buy order. I believe that smart money always knows where it wants to go and it positions itself for any kind of news good or bad and trades accordingly. So, it may sell on the good news and buy on the bad. This is how financial markets work. 

I saw bearishness in Canadian dollar in eur/cad and cad/chf pairs. eur/cad was lingering near support prior to the news and cad/chf was doing the same stuff near resistance. Cad had already rallied against the two for about two weeks. I noticed that under these circumstances you better look for a reversal rather than continuation of the move. And that’s exactly what happened. Canadian dollar fell against Euro and Franc. I was selling the loonie (and I am still on the short side with a small position). 

How? Look at the 15 minute eur/cad chart below to see that. You should see 123 reversal pattern there. The pair went to form a bottom at 1.3203 (that is 1), it then rallied to form a short term top at 1.3234 (that is 2). It then went to visit previous low and failed to break it at 1.3205 (that is 3) and then the pair broke 1.3234 level 10-15 minutes after the news was released. I went long together with smart money. I tend to exit before even numbers, so I exited my trade at 1.3290 level (ten pips before even number (as usually)). The good part about this trade is that market gave us time to place orders and run together with it. At other times you simply have to place your orders (or just one order in one direction) 2 or 1 minute before the news comes out. And if you are right you might make really nice cash on your news trade. 


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.