Managing your trading around important Economic data releases

hi there traders now this week we had a number of traders getting caught up on the price action following the release of the us cpi numbers now this number was a big number in the scheme of things comes on the back of really weak us nonfarm payrolls last friday unemployment cpi the two big connectors for the central bank you know when they are starting to look at changing rates and their forward guidance and all those sorts of things so really big number but the problem is with the result okay and sometimes the numbers are good to trade sometimes they aren't this was a situation where strong numbers the market wasn't really exactly sure uh how the how the market was going to respond right so let me just come to the charts to make it this a little bit easier to explain so we had um the big big move down uh the sorry the big move yeah down on the dollar you see here i was looking at euro up in the up in the dollar so this is following the non-farm payrolls right the dollar then finds fair value once that's factored in starts trading sideways the impact of a higher cpi in normal market conditions would be higher interest rates but the federal reserve have come out and said basically you know we're not going to do anything even if inflation is high but the situation was so let me just come back in one step the leading into the number right the best trading opportunity for us would be weak cpi numbers the dollar just craps out okay now let me just blow this um the dollar index up here so that's the situation we've got so you get the non-farm payrolls it starts trading sideways as we as we wait for the cpi numbers now as i said the uh the best trading result for us would be weak cpi it comes on the back of the weak you non-farm payrolls dollar just goes lower the other situation is if now if the numbers are strong what does it do well stronger inflation numbers from what the fed have told us they're not going to change uh interest rate or their policy right their policy plans but the situation was the numbers came out so much higher than expectations the market started factoring in higher interest rates anyway right and that that's a commonplace thing but check out the price section here particularly these two bars here around the release now a number that has mixed implications in this situation the fed's saying they're not going to do anything we get high inflation it doesn't mean they're going to buy dollars but the market will react pretty quickly straight away and go well higher inflation they buy dollars straight away right and then they say well hang on they're not going to do anything right so that it just corrects itself and what you get is convoluted price action liquidity at the time of this release is very thin what that means is wider prices and the currencies move around a lot more this was commonplace across a whole range of instruments now let me just come back and show you euro right a bit more uh almost a better example of what was going on because the euro had had a really uh crazy sort of release it sort of goes from one 55 one 20 55 up to 45 back down to the figure and then started going up so what i want to highlight is the problem of trading numbers when there's a mixed view of what the numbers mean now let me just give you the normal situation here okay or another view say the fed had said you know if we get really high inflation we're going to have to raise interest rates you could get into the currency as soon as you can and it would go higher you would not see that correction after the initial spike right but this wasn't the situation we got into okay so you've got to understand the numbers and which ones are going to give us a good clean trading opportunity at the time of the release and which ones aren't right that way you can avoid problems right what i'm talking about is problems with getting in at uh mixed levels now if i have a look here across across the board the um i played if it i mean there's the price section there on sterling it jumped around a bit but sterling's been sort of doing its own thing the aussie uh the kiwi they all had this even the um whoops the um dollar cad and dolly yen initially sort of spiked and sort of sat there so and dollar swiss for that matter and obviously the dollar index so they all had this crazy price action now it wouldn't matter if you got in uh straight away you'd probably be stopped out if you and if after if you're watching price action you can get caught up into getting short or not one thing to do let me just explain the best scenario here what you can do identify the potential release is it going to give me a clean opportunity as i said if the numbers were weak we would have a clean opportunity to sell dollars and you make money if it's a strong number it's got a mixed signal it's very hard to understand sit back and wait don't trade those numbers on the release itself because you want to see how it impacts and the way the markets are are behaving at the moment you want to see how these numbers come in impact the equity markets and the bond markets sure you give up a bit of um a bit of the price move but i tell you what in a situation like this this is a classic example of how beneficial it is right to wait for these numbers you see the huge numbers and you go okay if you waited you missed that first hour of crazy price action if not first half hour it's probably all over by then you start to see the initial move come out and then the market started to go so we saw initial dollar strength the market recalls that the fed aren't going to do anything it drops back down then they come back and go well you know what these numbers were much bigger than expected the dollar starts marching higher and that's the move now what can happen though i want to sort of focus on what could happen in this situation and this is very commonplace in the banks as well around what traders psychologically would end up doing now at the time of the release right you get uh you go long say you're getting long up here and you get flushed out on the move back down okay you get stopped out now you're nursing a loss and the currency starts going up again this is a really bitter pill to swallow you'll have a massive amount of anxiety you'll feel you feel like you've let yourself down that's all well and good but what you did you've got to understand before you trade into a situation like this you are getting into a highly volatile high risk situation so understand that in that situation i would always reduce my trade size at the very least if not just wait now if you have a loss here this is what invariably will happen to you right you say you you get in you get stopped out right and you see the thing starting to move to the top side as in the dollar rallying now just because you missed it right what more often than not happens you know when it gets up to here like let's say the dollar index for instance you you've missed the initial 40 point move so for some weird reason traders start to look to sell they look like you know what i've missed the initial move i'll pick the top okay i'll pick the top in dollar cad i'll pick the top here in dollar yen uh dollar swiss you know and i'll start to sell you know looking for to get for levels to get short in the other pairs but what you end up doing is you end up screwing it all up right when the data comes out and it's clear what the direction is right dollar strength right these pairs should be going up and this is what you've got to get really clinical about and these pairs should be going down right so let me just get these arrows in there so at that point there right you've got to think i'm a buyer now i know you've already bought and you've been stopped out the fact that you got stopped out psychologically changes your mindset you're thinking well i was a buyer i got stopped out so now i'm a seller it's absolutely this ends in catastrophe right because you know you're a buyer you end up selling trying to just what you're trying to do is get your cash back now the cash is gone when you come up to a trading opportunity like this you've got to be very hard-headed and say you know what if i get the first trade wrong i'm out you don't have a choice to go back in but for some reason traders start trying to pick tops here in all these other pairs right let me just change the color that pen so they're trying to pick tops this is problematic right because the currencies um can start like moving against you the other way and you start getting um you know you can start getting short dollars right you're starting to get long you think oh well i'll buy euros down here i'll buy some sterling i'll buy some aussie i'll buy kiwi no you're not a buyer the dollar is going up you're looking for opportunities to get long dollars not short us dollars right so it's a it's a it's a this is a quick one-two scenario right massive performance anxiety you get long it doesn't work out so you start getting short that is wrong so what you do is you end up digging a hole trying to get back that first initial cash so before you go into trading these opportunities make sure you understand what's the implications of the data release okay is it going to be an easy situation so there's that one there the um uh is this going to be an easy clear-cut situation where i can get into a trade right or not if it's not clear stay out of the initial price action right because you'll you will avoid wild price uh movements around the release as i said half an hour afterwards once the dust settles it becomes very clear what the market's going to do right or not in this situation it did dollar strength so then you don't go in and start trying to short the dollar on the back just because you missed the initial move right if you missed the initial move sit back wait wait for your levels wait for everything to calm down the best trading opportunities and the clearest are obviously after the fact right as i said if this was a situation where the fed had told us already that the higher higher inflation would lead to higher interest rates yes get long as soon as dollars as soon as you can but it wasn't the situation so first of all so two lessons here don't get yourself over involved on tricky releases like this one right you can get flushed out if you want to get involved probably decrease your trade size to half or a quarter of the normal position right it'll save you digging a hole lesson two don't start shorting the market trying to pick tops in the dollar if the dollar is going up just because you missed the initial move right if you have a loss during this situation right you've had a a losing trade right and you're out of pocket swallow that right you can't get that cash back straight away you've got to wait for the next opportunity to build and it may be if we got really a really strong dollar situation it would be buying it up through these trend lines right but we we lacked momentum there was a as i said a mixed issue with what the fed was doing and what the implications for the higher inflation was going to mean that's why the currencies have stalled but the next opportunity will be better once we get clear understanding around the data or what the fed's doing right so this is one of those lessons beware tricky numbers right first of all secondly don't start going against the data once the trade has happened trying to get your cash back if you've had a loss right this is this is a lesson that you need to really think about before you get involved trading uh the volatile economic data releases all right guys i hope that helps if it doesn't drop us a line on the virtual trading desk and i can answer your questions all the best