Expert: Joseph Trevisani, Analyst at FX Solutions
Topics to be covered during the session:
- Trade de News
- The Contrarian
- Trust the heavens: Financial Astrology
Who is Joseph Trevisani?
Joseph Trevisani has 18 years of experience in Forex trading and management and is a partner at FX Solutions. He is currently Senior Vice President and Chief Market Analyst; before assuming this position he was Head of Institutional Sales. Prior to joining the online trading industry Mr. Trevisani worked at Credit Suisse for 12 years in New York and Singapore as an interbank currency trader and trading desk manager. Returning from Asia he managed the Asian Trading desk and was a proprietary trader for The Bank of Bermuda in Hamilton Bermuda. He has a Bachelor and Masters Degree from Columbia University in New York City. He has been quoted in Reuters, Bloomberg, and the Wall Street Journal, written currency analysis for several internet websites and publications, and spoken at many conferences and industry events.
Session Material:
Introduction
The three trading concepts that we will discuss in these sessions are somewhat unusual in that they do not utilize technical analysis to identify trading opportunities.
The first ‘trade the news’ exploits the difference between anticipation and reality in statistical news releases and is essentially fundamentalist, though in practice it can deteriorate to mere price scalping.
The second ‘the contrarian’ begins with the sensible premise that markets must take profits, and that profit taking represents a profit making window for the astute trader.
The third, astrology, is a surprisingly serious attempt to track the effect of planetary movements on human psychology and the trading markets. I will not be examining the predictive ability of each concept, nor will we look at their ability to generate profits, their ‘track record’. Our focus will be on the basic assumptions and logic of each concept.
We will try to answer the question; do these concepts make sense when applied to the foreign exchange markets?
Trade the News
One only has to take a brief view of any currency chart to notice large rapid price movements at scattered intervals in the record; if the chart covers an extended time the periodic reoccurrence of these moves is striking. Most of these dramatic price moves are instigated by the release of economic statistics.
Currency traders know the effect Non-Farm Payrolls or CPI can have on the market. Unexpected political events can have a similarly drastic effect but since their timing is by nature unpredictable they do not enter into our discussion.
The schedule of information releases for any country or the Euro zone is part of the generally available market information and can be found on almost any market news service. It is the larger macro releases, the CPI, GDP, Non-Farm payroll (NFP) numbers that elicit the most attention, though forward looking indicators, such as consumer sentiment and the German IFO survey can produce volatile reactions as well. Economic statistics are most often collected by the national government; many of the other types of indicators are collected by business or academic organizations.
As the release date approaches the opinions of market participants, commentators, and economists about the pending statistic are collected by news organizations and a general consensus forms as part of the public record.
This expectation becomes a factor that market participants use to formulate their own views on market direction and informs the speculative positions they take. If a strong NFP number is expected traders will be more likely to open a long USD position in the weeks leading up to the release and so on.
The effect is incremental. Clearly the New York market does not arrive Thursday morning, remember that Non-Farm payroll is due the next day, and suddenly take the Euro/Usd up a figure (or down). But by the Friday morning of NFP the expected or consensus number is reflected in the USD trading level.
It is the size of the difference between this pre release consensus number and the real number that drives market movement immediately post release. For instance, if the market had been expecting a NFP of 215,000 indicating a strong US economy and the actual number is 115,000 this wide disparity will cause the USD to fall rapidly as pre- release long USD positions are closed and new short USD positions are established. When the number is at or close to the expectation the market often moves in an opposite direction indicated by the value of the number. This is perhaps counterintuitive, that a strong US economic statistic would cause a fall in the USD. But one must remember that the strong NFP number and the strong US economy it represents were already factored into the pre-release trading rate.
In the above example if the NFP release had been 215,000 as anticipated, it is likely that the Dollar would have declined in reaction, as traders, who were long prior, or perhaps hoping for an even stronger number, take profits on their long positions. In general the greater the difference between the expected release and the actual, the greater the size of the ensuing market move.
When the market adjusts after an unexpected number the price change is normally very rapid, often with large sequential gaps. It is not uncommon for prices to move 40, 50, 60 or more points in a few seconds. In this situation even one minute charts can be deceptive as they normally show the high and low for each minute but not the price movement within the minute. A move that on a one or five minute chart appears orderly comprising the full period in fact takes place in the first few seconds, with the remaining time spent in price action around the new level.
There is no question that scheduled news releases have the potential to incur large volatile movements in currency trading rates. So it would seem that they are an excellent opportunity for the online trader. However, given the twofold nature of these releases, that the pre-release market level incorporates the consensus view of the statistic and that any price movement generated by an unexpected number will be extremely rapid this opportunity should be approached with a good deal of caution.
In the days most immediate to the release the expected number is part of the overall background informing trading and any position taken in reference to the pending release would be subject to the normal vagaries of the market.
There is no specific point where speculation on the scheduled release dominates position taking. After the release it will be difficult to enter into a position quickly enough to take advantage of the move. Given that the majority of the price adjustment takes place in the first few seconds after a release even a hesitation of a few seconds may mean that 2/3 of a move is already gone.
It is unlikely that any trading tactic that entails entering positions after a news release will be able to produce consistently positive results. A similar problem exists for pre positioned entry stops.
They are activated by the price movement after the release so they do not depend on inordinately quick motor skills, but as the price action will often move through wide gaps after the release it is likely that orders will be filled at the next best available price.
If the market makes half or more of the full move in the first few prices, which is common, then the advantage of the trade is greatly diminished. Again, this tactic is unlikely to produce consistent profits because it depends on price action and the fill not on the trader’s view of the market.
Economic and statistical releases are part of the fundamental information for any currency.
They are most useful when incorporated into a trading strategy that ties their information to an overall view of the market.
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