Trading news and sentiment

You heading for the door?

Plenty of morons floating about. That dufas is obviously an extreme example of stupid. It really sets people up for failure. I wish there was a mature forum I could join to find like minded good traders to collaborate with. I can't do it with institutional traders due to policy but surely there is something of a higher standard out there.I have no issue talking to level headed people but the shit some of these guys come up with is unreal.

I promised I would post about my phased entry so I am going to make a cup and settle down to do it. Back in a bit.

i read you posts with great interest please share your thoughts/methods, there are others like me who sit in silence and try to learn how to analyze using the fundamentals

Thanks with your reply and please share your method or show the way.It is not all of us who understand that a strategies are just rubbish dustbin on their own.I always believe there is more in to just pressing trades.What I have learn is that people are divided into two:consumers and creaters,and there is no way one can just use those indicators or support and resistance, otherwise if it was a milking cow these forums should be dead.

Phased entry

I need to add a warning clause because this strategy will not go down well with an account that trades technically due to the nature of probability. This is because you cannot tell which trade will be a winner and which a loser.

I use the phased entry with great success to manage a situation where short term sentiment focuses the market on something different from the news catalyst that triggered the trade. The quality of the opportunities I look for are focused around central bank policy and therefore medium term trends. So you could look at this strategy as taking advantage of mean reversion with focus on medium term central bank rate expectations.

News can change sentiment in a blink of an eye. You can have good or bad data released followed by an unrelated tweet from a person of influence like Trump and suddenly short term sentiment is deviated from the initial opportunity. In these cases I look to first understand the implications of the sentiment shift. If the drivers are not factors that will affect central bank policy and don't have long lasting implications, then I will use phased entries.

As sentiment drives price opposite to where it should be going based on the catalyst for the trade, I will use the chart like I do to manage trades to look for congestion areas that tend to trap price. Throughout the lifecycle, i continue to look at the news feeds and market commentary for game changing information that will trigger an exit. This is no different to how I normally manage trades but in this situation I add more positions instead of focusing on the exit strategy.

I know many of you will be wondering what the heck this is suicide and if I were trading probability it would be but I am not. You need to understand that the fundamentals upon which central banks are focused are overriding factors. Sentiment that deviates from fundamentals will always wane and price will return to the medium term trend. This isn't like a technical trade upon which the entry is based on technical factors. This is a trade based on data that the central bank uses for defining policy. The expectation shift has just been temporarily paused while markets shift capital around based on the unscheduled data.

So instead of cutting losses I have adopted this strategy that takes advantage better prices. All my trades are undersized so that I can accommodate multiple opportunities in the market. I never operate on a basis of over exposure, I am far too risk averse for that. However, the situation is not a negative it is a positive because I can slide in additional trades using the same process I use to get out of my usual trades for better pricing. Trade management changes when this situation ocurrs. I already have a very complex process of managing trades which is always dynamic, never rigid. When price returns to the original entry zone I am pretty much done with the trade. I never hold trade in hope for more profit, that strategy doesn't work for me as news can and does change sentiment so the longer I am in a trade the greater the risk of news breaking it.

It's an advanced strategy that has worked well over the last 15 months and is actually pretty profitable. The key to it working is not guessing anything but keeping calm and doing the homework to ensure nothing is missed and the underlying reasons are fully understood. Never enter any trade or make any account affecting decision if you haven't done due diligence.

I have been somewhat reluctant to share this because on one hand the technical traders won't understand it because from their probability point of view its detrimental. On the other hand I don't want people to start making trade decisions and employ this strategy without appropriate understanding. I want to be as transparent as possible so for informational sake here it is. I strongly suggest if you undertake my process of trading that you only look at this when you have achieved a consistent level of success. You should also only ever work the orders so that the aggregate risk is acceptable.

For those of you that are interested I will start sharing the process. You can get going using free sources but I do use paid services although you can delay getting them at this early stage.

Tomorrow the work begins

Not all technical traders trade based on probability. Wyckoff traded based on how he thought the big stock sponsors prosecuted a stock campaign and the law of supply and demand.

There are 2 elements to what you are saying. On one hand what a person thinks will happen is probability. On the other hand, with stocks you have access to level 2 which can give clear insight into market mover activity. This is an area of technical analysis that isn't available in forex (not in a useful way atleast).

If you are however referring to technical analysis without level 2 then it can only be probability. No technical analysis in forex is unattached to probability.

To get you all started

I don't look at charts until I have entered a trade. This doesn't mean you have to drop them. You can mix fundamentals with technicals or do as I do and ignore technicals entirely. What you must not do however is take any element of technicals and have that be a leading signal for an opportunity. All decisions to trade are based off fundamentals and political through scheduled or unscheduled releases. If you desire you can then move onto technicals and this type of trading is done by many professionals so be flexible and find which side works better for you.

To outline my process you will need to do homework and this might put many of you off. If you find digesting central bank statements and economic data boring then you either have to suck it up and find a way to make it interesting or move onto a different approach to trading. I spend 2 hours a day researching everything from central bank statements to economic data and lots of analyst articles. Political, economic data, and central bank communication are first class citizens. Analyst articles are anecdotal but in aggregate and so long as you only source from quality they provide extremely accurate guidance on how the market is generally feeling about things.

I keep notes for each economy and it includes

1. Summary of central bank forecasts and policy
2. Summary of economic data points currently being actively watched by the central bank
3. Summary of major themes including political that has been watched by the market

Each weekend I review the next 2 weeks on the scheduled economic calendar. I am looking for data points that affect central bank policy. These are a mixture but mostly the red events on fx factory and some orange events. The watch list is not fixed, it depends on what the central bank discusses in their statements. Doing this gives me a good idea of what to expect and how to approach some releases.

I am going to exclude unscheduled events for now but wanted to touch on them a bit so you are aware. These are generally political events and can come from an interview on TV or radio, a tweet, or a leak to a newspaper. They are good trading opportunities but have the potential to destroy any trade you might be in. They will rapidly spread in the markets via real-time news feeds and squawk boxes. For now you need to be aware of them and so long as you are actively researching, you should immediately understand how it will affect you and if you can trade it.

Each day I passively watch news feeds to keep track of sentiment. If you don't know what that is, it is the mood of the market based on the most recent news spanning markets, political and economical. Sentiment is either risk on or risk off. Risk on money flows into riskier assets and risk off into safe havens. Using this information you are focusing on the causes of market moves and it serves another purpose, but not always, and that is showing you which currencies are the weakest. If bad service data is released for the UK then for the rest of the day (subject to no additional news), using gbp as the weak counterpart to any positive news with other economies is one way to pair strongest with weakest.

10 minutes before a scheduled release I get myself prepared for a trade. I catchup on sentiment, open my news release tools which is eikon but you can get away with free resources just not to the same speed of delivery. What I am looking for on the release is a deviation in expectations. You want to avoid small deviations because they have limited impact but the larger ones leads the market to a surprise that needs to be priced in. So I will have a pairing decided beforehand both ways. I have no bias on anything I let the data do the talking. If there is a deviation I will enter a trade as soon as humanly possibly and then manage that trade through charts, news, and price action. For now ignore this because you need to focus on educating yourself on understanding the data before you are ready to place a trade.

Next post will dive deeper into research and understanding the data. This post is just an introduction to my process.

Everything starts with the central bank. They hold the keys to policy and its policy expectation you want to trade. There are 2 important texts you need to be aware of (speeches are just as important but more on that later). The first is the statement and the second is the minutes. So here is the fed statement differential between end of September and the latest one (left September, right November). Notice the wording changes. This is forward guidance or central bank speak. In recent times central banks employed forward guidance as part of their communications policy. This is when they tell the market what they are watching and what their intentions are. The reasoning is to reduce uncertainty and surprises to markets but they tend to be very subtle about it so you have to rely on text comparison engines or news feeds where the providers have automated it for speed.

In this example notice changes to wordings around unemployment. It has moved from stayed low to declined. Employment translates into inflationary pressure. Also notice how wording on business investment where in September its grown strongly and November Moderated. Business investment is inflationary and a reduction implies a softening of inflationary pressure. Businesses are employers and therefore you can expect that the Fed will be keeping an eye on increases to unemployment.

The meeting minutes are several pages long and you gain far greater insight from those than the statement but both are very tradable. We could for example see a dovish hike where rates are increased and the market starts buying but the statement is dovish meaning they are not hiking for growth but normalisation of policy to give them room to manoeuvrer when the business cycle comes to an end and they need to reduce rates to stimulate the economy. This would translate into a reversal of the buying ( a whipsaw) and this is one example of how technical traders dismiss fundamentals because they only focus on the headline and not the detail.


More on research to come

The tools

 

1. Central bank websites - you can access these conveniently through the forexfactory calendar. Click on the yellow folder for the links. The same mechanism is useful to understand what indicators are by providing a description of the indicator. Set the filter to ignore all yellow events
2. Forexlive - an analyst commentary feed. This is an excellent resource and one that i use all the time
3. TradingEconomics.com - you can use this for faster data releases than forexfactory but primarily used for historical economic data which you will use as part of your research
4. Eikon - this is a professional grade platform that provides a ton of info including real-time filterable news feeds, market commentary, very fast news releases and a very rich calendar + more.
5. Ransquawk - Another pofessional grade platform. It is a news feed where analysts are actively filtering and doing the grunt work on the market and consolidating it into a feed. They use Bloomberg terminals, twitter, and other premium services.
6. ActionForex - filtered by fundamental analysis provides a consolidated feed of research and analysis by various providers including brokers and banks.
7. Twitter - you can consolidate feeds using twitter and subscribe to news squawks as well as forexlive, livesquawk, trump, reputable market analysts and traders.

You can get by in your learning without Eikon and Ransquawk. For now just focus on observing and learning. You want to study the cause and effect and i suggest you do something like this:

spend time on forexlive - this will educate you on market sentiment. Anything you don't understand you absolutely must research it. You cannot be in a position to make money by only focusing on half the information. The greater your understanding the greater your chances of success. Note today (Monday) is an empty economic calendar in terms of tier 1 quality data. So you will see forexlive be a littler quieter today but will be focusing on other issue like brexit, italy, trade wars, etc.

an example of central bank members communicating and how it will influence sentiment

On the wires, political example affecting gbp

https://www.forexlive.com/news/!/cab...dress-20181119

This is all interesting stuff EcoTrader, many thanks for posting. I'm going to plough through it slowly ............

Thanks it makes sense I am in!!!

thanks for sharing and many pips

A beautiful example of whipsaw news. May's speech drove the gbp down where she said they do not see the need to extend the integration period. This soon followed several different reports that swung price back to the upside.

1) European Parliament's Manfred Weber says the draft Brexit deal will not be renegotiated

2) Political editor tweeted - "'Gang of five' has not met so far today and may not do so.

3) Sky's Deputy Political Editor Rigby tweets "As of midday, Graham Brady hadn’t contacted No 10. ERG worried? “It’s early” says a source."

The first point to me is the main driver as the EU not wanting to renegotiate really puts pressure on the UK parliament because if they decide to vote against this deal then the UK is in for a shit load of uncertainty. If that happens sell GBP but you need to be there when that breaks else you will be getting in late in the move. If it does happen we could be looking at 3 to 5 hundred pips against GBP. It is one of those "few opportunities" that can give you huge % returns on a single trade.

The takeaway - Don't hang about to get slaughtered. Have a plan and employ it. Brexit is a heated topic with wild swings happening all the time. The best way to trade it is to take small nibbles out when the opportunity presents itself. Small nibbles all add up at the end of each month.

not tier 1 data - i never trade it but wanted to show what an extreme miss on expectations can do even on a low tier data point. Housing reflects people having confidence in lending and buying. This sort of low tier data release is generally good for 10-20 pips if you are about when it happens. Don't get caught up in missing stuff there is so much regular opportunity that it doesn't matter.

ok- I could hang about.
My wife's eyes glaze over when I talk about hedging and cb interest rate bias.

Mine doesn't even know I trade. Not sure how it's going to go down when it does