This article written by Dr. Stefan Friedrichowski and Christian Stern was originally published in the September 2014 issue of Traders' Magazine.
Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.
The Trading Idea There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP) or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic price movements take place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage and use it for a real profit.
An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.”
This is absolutely true. There may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.
- Dr. Stefan Friedrichowski is physicist and full-time trader and manages the scientific work and the development of trading strategies and Christian Stern is full-time trader and heads the treasury and the education department at Trading Stars.
Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.
The Trading Idea There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP) or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic price movements take place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage and use it for a real profit.
An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.”
This is absolutely true. There may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.
Editors’ Picks
EUR/USD remains on the defensive below 1.0400 on hawkish Fed rate cut
The EUR/USD pair weakens to near 1.0370 during the Asian trading hours on Thursday. The hawkish rate cut by the US Federal Reserve lifts the US Dollar and drags the major pair lower.
GBP/USD trims early gains and reaches fresh December lows
GBP/USD trimmed early gains and fell to fresh intraday lows in the 1.2550 price zone following the United States Federal Reserve's announcement. Financial markets rushed to buy the US Dollar ahead of the Bank of England monetary policy decision on Thursday.
USD/JPY jumps above 154 after a hawkish Fed and ahead of BoJ
The USD/JPY pair is trading well above the 154.00 mark after the US Federal Reserve delivered a hawkish 25 bps rate cut. The Bank of Japan is expected to remain on hold, although a rate hike can't be ruled out.
Editors’ Picks
USD/JPY jumps above 154 after a hawkish Fed and ahead of BoJ
The USD/JPY pair is trading well above the 154.00 mark after the US Federal Reserve delivered a hawkish 25 bps rate cut. The Bank of Japan is expected to remain on hold, although a rate hike can't be ruled out.
AUD/USD refreshes multi-year low amid post-FOMC USD strength
AUD/USD dropped to the 0.6200 mark or over a two-year low this Thursday and seems vulnerable to extending its descending trend. The RBA's dovish shift, concerns about China's fragile economic recovery and Trump's tariff plans continue to undermine the Aussie.
Gold sees a dead cat bounce following Fed’s hawkish cut
With the full final week of 2024 almost drawing to a close, Gold price remains vulnerable near one-month lows below $2,600, licking the hawkish US Federal Reserve policy decision-inflicted wounds.
Bank of Japan set to hold interest rates steady as rising inflation hints at early-year hike
After concluding its two-day monetary policy review on Thursday, the Bank of Japan is expected to hold the short-term interest rate at 0.25%. The BoJ policy announcements will likely provide fresh cues on the central bank’s rate hike outlook, injecting intense volatility in the Japanese Yen.
Sticky UK services inflation to come lower in 2025
Services inflation is stuck at 5% and will stay around there for the next few months. But further progress, helped by more benign annual rises in index-linked prices in April, should see ‘core services’ inflation fall materially in the spring.
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