Trading the News (2)

Another observation that is certainly of key importance is to check the direction of the trend on the currency pair you are going to trade. To check the trend I use the 4 hour chart. I do a couple of things to help me better understand the trend. First, I put on the alligator indicator for a quick look at the strength of the trend.

If all three lines are pointing up in a 1 to 2 o’clock angle then it is an uptrend and If all three lines are pointing down in a 4 to 5 o’clock angle then it is an down trend.

Another way to get a general direction of the trend is to look at a 4 hour chart and draw a line from the point where yourprice bars start on the screen to where they end and get a direction that way.

You can also draw simple trend lines if you feel comfortable with trend lines. Once you have an idea of the direction of the trend, and depending on its relative strength, it may be wise to trade the news announcement in that same direction. In other words, if the market is trending strongly before the news announcement, you will be better off not fighting that trend.

When the trend is UP, on the 4 HR chart, and the news drives the market DOWN, after a drop in the price, watch for a turn in the price to the up side with a continuation of the direction of the trend. This would be referred to as a ‘whipsaw’ and is a very common market reaction to moves driven by the news. Don’t fall victim to the whipsaw, rather, wait for the market’s true reaction.

When the trend is down, on the 4 HR chart, and the news drives the market up. Watch for a turn to the down side with a continuation of the trend.

When the trend is up, on the 4 HR chart, and the news drives the market up, you can see a sharp move up with a period of rest and then a resuming of the trend.

When the trend is down, on the 4 HR chart, and the news drives the market down, you can see a sharp move down with a period of rest then a continuation down then a resuming of the trend.

Below is an example of a good trend and some of the areas where news went against the trend and then came back. You will also see places where the news went with the trend.

When trading the news don’t think of the market as an ATM machine that owes you instant cash, or a certain number of pips. When you buy there is always someone on the other end selling. So if 20 people show up to buy and there are only 10 lots for sell then someone will not be filled until some more lots show up. When the price gets good enough for the seller then you may buy, but it may not be at the price you would like.

Trading any strategy takes time and practice. You need to become good with your indicators and trust what they are telling you. If you trade the news right, you should be looking to grab a few pips from the middle of the move. Don’t reach for the tops and bottoms of the volatility caused by the news, as often you will be misled by doing so. Be patient with your analysis and try to trade with the previous trend of the currency. Trading the news is no simple task, but success can be had if you can avoid the greed of trying to capture the entire market move. Instead, wait out potential whipsaws, follow the trend, and be content to grab a small portion of the market’s move.