Market sentiment towards a currency pair, and hence price, changes when new information comes into the market.
The most common situation that creates such a change is the release of economic data. These are planned in terms of timing to theoretically offer no market participant an advantage over another market participant.
Economic data revised
For those of you who are less experienced traders it is worth pointing out three important points:
a. Some economic data releases have the potential to make a greater impact on market sentiment than others. It is beyond the scope of this article to explore this in detail, however major data points include for example GDP, jobs data, CPI (inflation measure), and interest rate decisions.
b. It is not the number per se but rather the comparison against what is expected. There is a market consensus “baked into the price” already, a projection in other words, as to what is likely to happen to major data points. So, it is the closeness or otherwise to this expected figure that is the key factor. A big miss in either direction is likely to have a far more significant impact on market sentiment than a figure that is at, or close to, expectations.
c. Also, the importance of a data point is to some degree relative to the timeframe you are trading. For example, in a shorter-term position where you position higher but are aiming for a smaller Pip move to take profit, economic data is more important, than perhaps when trading a daily chart.
As a Forex trader, you have one key fact in your favour is that the time of these announcements is entirely predictable. What this means to you is that you can make a choice and “programme” into your trading plan potential action(s) when faced with the prospect of significant imminent data release.
Your trading choices
Assuming you already have a defined exit general strategy in place for open positions that includes having a trailing “stop” should a trade move in your desired direction, you have THREE potential choices to make.
Accepted good general trading practice would be that you “plant your flag” in one of these as your standard. Once you have planned and implanted this, then you can prospectively test the other two, to determine which is the optimum individual “fit” for you as a trader.
Your three choices are:
A. To close any open positions that are likely to be impacted by the data release to remove the risk of loss from your existing dollar result in the position. Although reducing downside risk you are also risking losing fast upside potential, should price move quickly in the direction of your trade.
B. To do nothing new i.e. adhere to your normal trail stop strategy. In this case you have retained the opportunity of upside potential whilst increasing the dollar risk associated with your wider stop (compared to the next option) being triggered. It is worth bearing in mind with this, and the subsequent choice we will discuss, there is always chance of some slippage i.e. not been filled at expected order price. The risk of this is that it’s highest with the often-higher volatility situation following data release.
C. To tighten your normal approach to trailing a stop e.g., if your norm is to trail your stop to within 20 Pips you could choose to tighten to within 10 Pips of current price pre data release as part of your system. What this means to you is that if a trend does reverse and trigger your stop it will be at a better level, whilst still giving you any upside potential.
What these all mean to you:
A. Articulate within your trading plan what is your primary approach and clear any unambiguous situations where you may vary this.
B. As stated before, choose to trade the approach that you prefer right now, and then compare potential results against the other two.
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This article is from GO Markets analysts based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs. Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice. Find additional currency trading education resources here.