Thursday, 6 June 2013

Trading a High Impact Event

Excel Markets Demo Account Forex Trading Contest, June 2013Trading a high impact event can be a scintillating experience, should you be on the right side of the market, or, if you are not so lucky, it can be as painful as a dentist dealing with your impacted tooth.  With the possibility of a wild market, caused by the unpredictable events of the day, do you really want to be involved?

The Non-Farm Payroll report issued monthly by the Dept. of Labor is an example of such an event.  Because the report is complicated and the government has the ability to make seemingly arbitrary adjustments, for the trader, this report is a challenge. 

An example of the government's unpredictability is the so-called births and deaths estimate.  This report, of course, refers to how many new businesses have been started, and how many have been shuttered.  The reason they are estimated is because of the lag time between when there is a business start up, and when the Labor Dept. becomes aware of the activity.  Likewise, the status of companies that have died cannot be quickly identified by the government.  In time, the government has additional information and makes adjustments to previous reports.

Why then, trade these reports?  They can be erratic, seemingly unreliable, and are consistently adjusted.  Putting on a position that will profit if your guess that what the report is going to say is correct - this is not a trade, it is a gamble.

What happens, though, when you already have a position that involves the USD?  Well, if you have a stop loss that is reasonably close to the market the chances are you may get stopped out.  The market seems to have eyes.  It sees your stop.  It is best to cancel the stop, and hedge your position.  After the report, and your assessment of the market remains the same, lift the hedge and carry on, or, if you are wavering, take both trades off.

It is my opinion there may be some trade opportunities after the report.  To be prepared, you must do your market analysis ahead of the report.  Then, should the report provide some volatility, and reaches a target level where you wish to be, for example, short the EURUSD, put a resting order in the market.  We all know what an advantage it is to have the right entry point.

Click to Enlarge EURUSD Daily Forex Chart

The EURUSD put on quite a show today.  As we mentioned in our comments here last week when the market was trading under 1.30, a break-out above that handle would result in a short squeeze.  The latest COT report showed the short position increased to 109.3K contracts, a more compelling reason for a short squeeze.

The EURUSD (FXE, UUP UDN) breezed through the 1.31 handle and spurted all the way to 1.33.  It looks like there was a concentration of stops above 1.31.  How far will the market go if a report tomorrow is bearish on the USD?  I guess I would be approaching the short side on a rally to the 1.34 level.  As always, mind your money.
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