Event Driven FX Trading

Event Driven Trading strategy



I welcome you very warmly


I have registered on the forum a few weeks ago however I read it since 2008 what makes me believe that I’ve already read most of the topics page by page. It is difficult to start such a topic as I feel a little bit overwhelmed by my experience – 10 years is a lot of time and I read so many articled, tested so many strategies that I could write a book – but this is not my point. I would like to present you my essence of trading ,the way I see the market, the way I feel the market.


What makes trading beautiful is that it emphasizes one’s character- GOOD or BAD – it will show whether you are born to trade, whether you act in a chaotic manner, whether you are precise, very detail in what you do, whether you are nervous, stubborn, uncertain or unreliable.
You will break the rules, you will anchor with a position, stick to the market direction, you will do opposite to what you should if you have the cons.
Every character is different and every character has to find his way to trade markets. Why did I write it ? Because I cannot assure that you will be able to see the market the way I see it, act the way I act or that you will feel comfortable with the system that I trade. I can assure you that I did all I could to test it thoroughly.


Markets and especially fx is a special kind of place where you can find a lot of information, you get such huge portion of information that without experience when you read it you have no clue of what is happening and usually make wrong decisions.

Traders usually are afraid of information as people are afraid of unknown. Guru tells you not to trade during news publication, listen to you and your head not any other person.
It is research and good methodology that can make your trading profitable not any indicator that will stick to the market and show you the past. What you should do is to find and edge that is a good predictor for the market. For example you test your expert advisor and you get superb equity curve – so ? does it mean anything ? NO, you have just overfitted to the past and found magic formula for the past.


This topic will be concerned on investment on all possible news and macroeconomic data. ( tricks, tips , mini strategies for different situations ) No Merkel talk, no Bernanke talk, no pseudo market analysis. Pure macro, pure exploitation of market inefficiencies – fast profit , fast loss. I will try to show you how to read macro and interpret data, technical tricks + macro.



Today I will show the only position I had. GBP LONG Tomorrow, more theory and facts - principles of a strategy.



Below you have GBPUSD unemployment data which was far above expectations with RISK ON sentiment on the market ( qe3, positive reactivity on other risky assets ). GDP consolidated before BO ( breakout ) where other risky assets did it earlier ( these are some elements that I look at and they make this strategy work - make it profitable )

Stop was very tight 10pips at the beginning with take profit of 10pips as well. I've activated TS which is very important for this strategy if not obligatory because reactivity is usually very rapid ( especially on GBP which makes it with one or two M1 candles ).


I hope to see some comments and tomorrow I will move on


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Sounds good, will follow your presentation and appreciate your input. I see you planned your trade on the 1 min chart, is that just for entry?

When you are investing during news publication you have to act very fast - there is no time for thinking about direction, about lot size, about Sl, Tp- simply speaking you have to be prepared as no emotions are desirable - and the M1 chart that I have opened is not random. It gives me a clue about the cycle phase that we are in.

I wanted to write about it later but nothing will happen if I will write about it now. Look at the picture below. I distinguish 4 different cycles on the market. These are: decreasing amplitude, increasing amplitude, constant large amplitude, constant small amplitude.


What do you think, which phases(phase) are/is the best opportunity/ies just before news publication ? If someone answers correctly I will continue


http://img594.imageshack.us/img594/6...1babfb218d.png

Do keep going, although it is a pity the thread is in this Discussion forum as it is a little quieter than the others.
I will pitch for No.2 increasing amplitude as presenting the best opportunity for trading a news event, but I may be wrong.
Pipernet

Topic can ba moved some day as it was at the beginning. Don't worry, people will decide where should it be.

I have to tell you that your assumption is wrong.


First of all try to imagine the situation when the market is increasing its volatility before event publication.

It can be a situation when:

-it did new day high/low, it can be already exhausted, it made it's average range
- it might have exploaded by another trigger which was another publication - some information are more important than others and can overshadow less important publications and move market to increasing amplitude phase
- it might have exploaded by another trigger which could have been market makers pushing the price to another liquidity cluster which is perfect for them to get big positions in a short price range

Imagine that market is in a range before event publication, what most of you are doing is setting Stop Loss below and over such a range. Now question: what is your stop loss order on the market ? What it is exacly ?

Well. Over high of a range stop loss is a Buy Order , Over low of a range stop loss is a Sell Order.

Now conclusion: what would be the easiest way for market maker to make some money on you ? Push price Up then Down then up again GET YOUR LIQUIDITY which is give for free as you are predictable and it is increasing volatility which is phase two. Don't play it, don't gumble.

Here you have another example of increasing and decreasing phase. This is the same as previously but now swings are made.

http://img203.imageshack.us/img203/3...646ae82e80.png


What is the perfect phase then ? What makes market perfect for event driven investment ?

Perfect is: decreasing amplitude, constant small amplitude.

One of assumptions for my strategy it to find calm, undisturbed market by any other fundamentals factors or any other chaotic elements of the market.


Decreasing amplitude:
- Market stopped making new high and lows - it's waiting - it started moving in a range
- Market is moving in a range after it made new high and low but it was some time ago


Constant small amplitude:
- Market is definately waiting for breakout - but breakout has nothing with technicals it's 100% fundamental

WARNING: in a small constant amplitude traders put a lot of stop orders ( BUY STOP, SELL STOP ) - usually if it is really small range Market Makers try to hit one side before moving in direction of the data thats why putting Stop Loss one point below low/high seems useless.




By the way. Today we had another two important annoucements. First was Retail Sales for GBP, second Unemployment for US.

In both reaction for data for straighforward. In GBP we had the same situation as yesterday, beginning of London Session, no abrupt move made, DEACREASING PHASE after the first move of a day ( moving to the center of consolidation, range ) so I will not put it here again - you can see result on your own. It was the same as yesterday - on one big MOMO candle.

But, second data which I played was far more interesting. Why ? Look at the picture

First of all it was decreasing phase as well, secondly it was USD. I Short it. Some of you probably know why - this is asset aonnected with RISK. We either take the risk or seek safety - the same is with currencies But I will write about risk tomorrow - today I played two event publications. I will not play Philly Fed Manufacturing Index as we have summit today ( I hate summits recently ) and usually results are published at the end of London Session so Philly Fed may be overshadowed by this summit - I prefer to invest when I have an edge and when the risk is at the lowest possible level.

Hope to see you tomorrow !



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Very interesting and nicely put, much appreciated.
Lesson learned is to look out for periods of decreasing or constant small amplitude & the USD asset is related to risk on and risk off.
& Thanks.

I look forward to reading your new thread. Very interesting topic.

I am new to trading fundamental announcements. Currently i am trading using 1hr bar chart. It has been quite tricky lately. the strategy i use is a 25pip stop, 75pip takeprofit. I'm very interested to hear what you have to say. Have you got any more information anywhere on the web that you follow in regards to announcement trading?
Thanks

Single currency cannot be related to both: RISK ON and OFF.


Correlation, moneyflow is one of the most underestimated and neglected aspects in trading.

People usually try to invest in the same time in GBP, AUD, EUR, NZD they pick even some exotics as CZK, HUF, sometimes cfd ( contract for difference ) like SP500 and believe that they diversify the risk.

The worst scenario is making investment decisions in this currencies having both long and short positions while the correlation is positive ! But let me explain it to you a little bit further.





Market moves in two different modes: RISK ON/OFF




When we are in a mode called RISK ON there is no need to keep reserves in USD which has nearly zero interest rate ( it is minus in real because there exists something called inflation and year over year your money depreciates ). Money doesn't like to depreciate so it looks around and search for opportunities.

Opportunities have its cost - nothing is free - so what does money do ? It calculates the RISK and if it is minimal it compares RATE OF RETURNS from different assets.

Many assets are denominated in USD: GOLD, OIL and other commodities. Many central banks have its reserves in USD. Even if FED inflate their money it is still safe haven, even if their bond rating was decreased it is still safe heaven.

What other reliable instruments do we have that investors like even if they do not bear high interest ?


German Bonds - at the peak of a recent crisis they had minus yields.
CHF - over the years they gained trust among investors
GOLD- when money inflates people search for non-inflationary investments.
JPY

RISKY assets:

If risk of investment on different assets is comparable then money choose the higher interest rate. That is why the currencies connected with risk are EURO, GBP, AUD, NZD and other exotics. The higher yield on their bonds the faster appreciation during RISK ON mode.



Whenever risk appears that is bad news publication, rating cut, money and market as a whole move to the safe currencies ( USD, CHF, JPY ) and commodities like GOLD.






That is why good data for unemployment in US is good for market as a whole, thats why good data from housing market from US is good for whole market not for USD because USD is treated as a safe heaven. USD is GLOBAL CURRENCY and data from US is treated globally and indicates general sentiment not demand for USD.






Conclusion:
When there appears good data for USD invest in risk.
When there appears good data for EUR invest in EUR currencies with low spreads ( but better are other than EURUSD as USD is global and is influenced by many factors )

CAD I believe is special kind of asset - it it not risk nor safe heaven. It is influenced by US economy and heavily dependant on it.

AUD, NZD, GBP are currencies that respond to macroeconomic events very well.






It has been a realllly long post Longest I ever made but I am a perfectionist and if I decided to show you something I will do it the best I can.

http://img197.imageshack.us/img197/7...6dbbfab35d.png

Nicely put, interesting thoughts, well organised. Please carry on.

Are precious metals related to the weakness of the dominant currency?
Ive seen Silver move up on weak Euro , and other times on weak dollar.
Thanks.

i didnt get the risk on/off thing and how is it risk off?
waiting for more posts
nice job

Just wanted to note something regarding risk on/risk off (RORO). What you described may be how it is at present; but RORO and the assets which correlate to risk are not constant, they vary and change depending on a number of factors as well as the general state of the world. USD used to have a positive correlation with risk (appetite), now it's a safe haven. Lots of assets all move together on general RORO, all much more correlated than before; it won't last forever. Earlier this year there was a short period when the negative correlation between US news and the USD broke down; and I can remember a year or so ago when the USD would get sold off as much as the euro on negative news, in favour of the safe havens CHF and JPY.
My point is simply that you all must bear in mind that these are dynamic rather than fixed phenomena, so beware that the correlations will (eventually) change.

I've attached a couple of papers examining RORO by HSBC which you may find interesting, they include heat maps showing how the correlations between assets changed over time.

Eurotrash - thank you very much for your contribution to the topic.




With precious metals and commodities it is not that easy. Fundamentals are very important and they are much more speculative than currencies.


For example:

- minimum margin can be limited or increased

It means that you need to have bigger deposit to open the same position in comparison to what was previously or if you have opened it already you will need to liquidate it.

Or it will mean that you have more free money and the bubble can grow - it is always like this in commodities.

- precious metals have its specific because of the lower liquidity

Gold always before any move UP is going very low ( loses correlation ) for weak hands - money makers know it and it is always like this.

Weak hands are people with tight stop losses.

- correlation is stable in a longterm but not stable in a short period of time - as EuroTrash written I am writing about what it is now - correlation may change even in a longterm but something very important must have happened ( cannot imagine for now what it could be ).
For example: pegging EURCHF to 1.2 was such an event. ( ad. EuroTrash )

Markets are not predictable all the time as people are not predictable. It may happen that EUR will increase in value while GBP decreasing. It is perfectly normal and what you should know is the general rule.

Look at the picture below - generally EURUSD is positively correlated to GBPUSD, but there has been a period of time when correlation was nearly zero.

Correlation = 1 = One positive EURUSD candle = One positive GBPUSD candle.
Correlation = 0 = there is no rule - sometimes eurusd can have the same candle as gbpusd sometimes not - no correlation
Correlation = -1 = One positive EURUSD candle = one negative GBPUSD candle.

As you can see EURUSD is mostly positively correlated to GBPUSD.


http://img843.imageshack.us/img843/2...b73b224f6d.png



It means that general rule for Risk On Risk Off seems to be stable since long period of time and we should keep it in mind making our investment decisions.

Risk Off is a mode when people are worried about the future and prefer to keep the money ( Bonds - because their profit is ensured by some institution, Gold - because it doesnt inflate in a longterm, or USD because everyone keep usd as a reserves ) rather than make investment decisions and take the risk even if the profit would be much bigger.


If bad data is published, if sentiments indicators hit their low economic conditions are not very encouraging. Everyone take the money ( stock are going down ) and have it in different currencies. If you have a lot of money and there is a risk that the economic conditions will continue getting worse that your money will devaluate you start to buy CHF, USD, JPY as you BELIEVE that after some time it will still have some value.

In micro perspective of single publications I use the fact that currency may be undervalued or overvalued ( no one knows it ) and if results are below expectations market is moving in a very fast pace to USD to find its fair price again.

Sentiment on the market is very important because it creates rapid moves. No one wants to be the last one ( selling or buying ) and if data are really bad such a person just sells - if you add to this lower luquidity on the market ( less obstacles to stop the price ), stop orders you get in result fast undisturbed move and that is what I am looking for.

Of course if a market is in an unpredictable phase you can just watch it running after publication in the opposite direction. It is perfectly normal and I compare it to the setup selection in technical analysis. You have to find your perfect setup as well here , wait for your best opportunity not hit the buy, sell button everytime the publication appears. Even if you make selection there are still a lot of opportunities.

Be as the hunter at the lookout. Sneak up, wait and make one but precise shot.

hey EventTrader good explaining.
how you get your data on some important event do you read news or you just go with the calendar and place your orders?
i get confused reading about events and the i miss the trade and yet dont know whats happening lol.
thanks for the info

Yes I look at the Calendar but do not play it (it is too slow, I mean the latency, I prefer to use other softwares )



I have also bloggers, twitters that I follow and I try to read all market gossips. They are very important as sentiment is very important on the market. Even if I perceive some data as irrelevant but other traders believe it is not I do not argue. I just add this data to my watchlist and short before event publication I decide to play it or not.



Beside this I ask myself:
1. What is the market waiting for at the moment ?
2. Which data on which currency pair will be played today ?
3. Can anything before event publication disturb the outcome ? ( this can be some statement, speach, conference, unexpected information )

Woah, it was a nice piece of fundamentals a few minutes ago.



Let me explain it to you:

We had core retail sales from Canada.

Higher sales means higher inflation expectations means higher interest rates what means stronger currency ( of course if inflation is in its anticipated range -for Canada it its 2% )

USDCAD already made its daily range so Long positions and anticipation for further depreciation of CAD was not what I was looking for.

Instead of it I decided to Sell USDCAD. In a very first minutes nothing happened, my positions was even against me so I decided to keep it till the statement - this position was not the one that goes rapidly into the predefined direction but I have taken the risk to keep it opened ( something was wrong with it but not the direction ). It would be unwise to close it in a panic.


Here you have the statement of bank of canada. Can anyone of you guess what was the most important inside it ? Which word and which anticipation ?

http://www.bankofcanada.ca/2012/10/p...se-2012-10-23/


Sometimes ( not very often ) I am very happy that I trade in a decentralized market, look at the take profit and slippage This is how it happens when your broker is looking for liquidity from its liquidity providers.

http://img10.imageshack.us/img10/579...66f8976fb9.png

Very interesting and enjoyable post as usual Event Trader.
I would venture to say that the most important piece in the Bank of Canada announcement was:

"Over time, some modest withdrawal of monetary policy stimulus will likely be required"

But of course I could be wrong again......

Just wondering about your UsdCad trade did you have some preset take profit on the trade.

Regards,
Pipernet.

This one was very important because we live now in environment that prefers different types of monetary stimulus and moving away from this pattern may be a little bit suprising. I also look at their expectations about inflation which they believe will grow to the level of 2%.

Higher inflation means higher interest rates ( to suppress and control inflation ) ) means stronger currency. I will add to my watchlist now all data concerning their inflation and the most important will be CPI ( core price inflation ) - this is the second country now which inflation I am watching very thoroughly. First is USD because of their stimulus packages.





Yes. I usually set 10 points Stop Loss and 10 points Take Profit.

Sometimes it is 5 points Trailing Stop Loss with no Take Profit ( it means limit is the sky ) but it depends on the importance of incoming information.






Today we had another two publications that I like very much. First is German Flash PMI ( production is very important for economy and if it is production of Germany it makes it nearly a shot with 100% probability of success - if you stick to the rules ) and second is German Ifo which in my tests on tick data had really good results ( without other supporting rules and filters )



Unfortunately this time I had a big delay from my data provider thats why even if it is one of my favourite publications I couldnt play it with 5points Trailing Stop Loss.








Concluding: The lesson that you should learn from today is following:

-Look at the breakouts made during event publications

If data following first publication concerns the same economy ( this time it is Germany ) and it is again below expectations, and previous reaction on data was correct it is a good opportunity to trade.

- add German Ifo, Flash Manufacturing PMI to your watchlist.


PS: I have underlined the word expectations. It is very important as most of the rallies or steep fall downs are made on expectations or disappointment on previous expectations. Expectations build sentiment.


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