I wanted to test an idea I had concerning how prices react to news releases and wanted to know what people here at FF thought about this concept before going forward with it. I'm gonna explain in a sec but first i just want to make something clear: I dont want to start a discussion about technical analysis vs fundamentals. Also, as a disclaimer, While i have extensive knowledge about asset valuation and financial theory I have yet to accomplish any kind of consistent profitability, at best i might be able to claim that im consistently breaking even, so don't take anything I say for cash. The truth is that if I was doing 10% a month I would probably not bother posting here, but unfortunately i'm not so I figured that if I could find a couple of like minded people that wouldn't mind sharing what they know and maybe even working together that would be great.
So enough with the blabla, let's get down to it
The concept is fairly simple but surprisingly harder to put in practice. If price reacts heavily to good news and really not so much to negative news then the sentiment is clearly bullish and an uptrend is more likely to continue. With that in mind, the objective is to make a quantifiable sentiment gauge based on price action put in relation to news. A tool like that would help determining the strength of the trend ,potential turning points, ranging markets and it could even help identifying relevant support and resistance.
Now, let's go in a little more details. The underlying principle is a twist of the well known "buy the rumor, sell the news" saying. Not all news release are relevant in assessing the intrinsic value of a currency, but they can be used nevertheless by informed market participant to obtain better entry prices and to enter sizable position without drying up all of the available liquidity.
For example, let say trader A works for goldman, has deep pockets and is pretty good at what he does.
This trader wants to short the dollar because he thinks the fed will taper sooner then later and the consequences might be really bad for the USD in the sort to medium run.
On the other hand we have trader B, who's a scalper, and not a really good one at that. He tries to capture small moves on a daily basis. All he watches are technicals and the news releases of the day, he has no concept of the broader context of the market.
Now let say, we are a thursday and the jobless claims number comes positive for USD. Uninformed trader B shorts right away eur/usd thinking that the USD is now bullish. On the other hand we have trader A that is patiently waiting with his buying orders sitting lower, he his waiting for the rush just after the news to fill up his order, he is waiting for those MAs to point down and cross, and for the rsi to go downward and go through the 50 level. He knows that the market will be able to absorb those weaker hands and sweep their stoplosses right after because he knows that even if there is a random good news for the USD that day the outlook for the currency is still pretty grim. The stronger hands that thinks like trader A are gonna continue to use the other market participant to accumulate EUR and dump USD until the fed tapers or something significant happens and they change their minds about their previous assumption.
So to sum it up, we want to know what trader A will do without actually knowing what he knows because let's face it, us little traders do not possess the resources or the connection that trader A has. And I think that the combination of PA and news can help us do just that. News affects liquidity, it means that market participants are taking action. On the other end PA around those times leaves traces, it hints at the intentions and opinions of those market participants, If we find a way to make sense of the PA at the times the market is most active we have an edge over randomness.
PS: I was just wondering if someone knew of a way to get the recurring news release like jobless claims, nfp and others to an excel spreadsheet without copying them manually one by one. It does not seem that it can be done using the FF calendar tool. I have also done a quick search on the interwebs but did not find anything. If someone could point me towards the right direction that would be nice or else I guess I will have to do it manually, not the end of the world by still, it would be a pain in the *** doing it that way knowing that FF and other websites could so easily make this data downloadable to csv file.
So enough with the blabla, let's get down to it
The concept is fairly simple but surprisingly harder to put in practice. If price reacts heavily to good news and really not so much to negative news then the sentiment is clearly bullish and an uptrend is more likely to continue. With that in mind, the objective is to make a quantifiable sentiment gauge based on price action put in relation to news. A tool like that would help determining the strength of the trend ,potential turning points, ranging markets and it could even help identifying relevant support and resistance.
Now, let's go in a little more details. The underlying principle is a twist of the well known "buy the rumor, sell the news" saying. Not all news release are relevant in assessing the intrinsic value of a currency, but they can be used nevertheless by informed market participant to obtain better entry prices and to enter sizable position without drying up all of the available liquidity.
For example, let say trader A works for goldman, has deep pockets and is pretty good at what he does.
This trader wants to short the dollar because he thinks the fed will taper sooner then later and the consequences might be really bad for the USD in the sort to medium run.
On the other hand we have trader B, who's a scalper, and not a really good one at that. He tries to capture small moves on a daily basis. All he watches are technicals and the news releases of the day, he has no concept of the broader context of the market.
Now let say, we are a thursday and the jobless claims number comes positive for USD. Uninformed trader B shorts right away eur/usd thinking that the USD is now bullish. On the other hand we have trader A that is patiently waiting with his buying orders sitting lower, he his waiting for the rush just after the news to fill up his order, he is waiting for those MAs to point down and cross, and for the rsi to go downward and go through the 50 level. He knows that the market will be able to absorb those weaker hands and sweep their stoplosses right after because he knows that even if there is a random good news for the USD that day the outlook for the currency is still pretty grim. The stronger hands that thinks like trader A are gonna continue to use the other market participant to accumulate EUR and dump USD until the fed tapers or something significant happens and they change their minds about their previous assumption.
So to sum it up, we want to know what trader A will do without actually knowing what he knows because let's face it, us little traders do not possess the resources or the connection that trader A has. And I think that the combination of PA and news can help us do just that. News affects liquidity, it means that market participants are taking action. On the other end PA around those times leaves traces, it hints at the intentions and opinions of those market participants, If we find a way to make sense of the PA at the times the market is most active we have an edge over randomness.
PS: I was just wondering if someone knew of a way to get the recurring news release like jobless claims, nfp and others to an excel spreadsheet without copying them manually one by one. It does not seem that it can be done using the FF calendar tool. I have also done a quick search on the interwebs but did not find anything. If someone could point me towards the right direction that would be nice or else I guess I will have to do it manually, not the end of the world by still, it would be a pain in the *** doing it that way knowing that FF and other websites could so easily make this data downloadable to csv file.
It's not about what you make, it is about what you don't lose