Hopefully the title has caught the attention of new traders. On Friday, 2 December, 2016 at 8:30.a.m EST the United States Bureau of Labor Statistics will announce “non-farm payroll” data (it is announced the first Friday of the month). In the seconds prior to the announcement and while the announcement is being digested the spreads on USD pairs may become very large. If you have a tight stop loss you will be stopped out, it is a certainty.
Plan ahead and avoid this loss.
[B] Why?[/B]
Presently an increase in the U.S. interest rates on 14 December has been priced into the bond market at 100%. The ADX payroll data released yesterday supports the increase. Tomorrow’s NFP by all accounts should not have significant impact. The perfect conditions for the unexpected to appear.
In advance of the release of the data, institutional traders (including algorithms) will significantly reduce trading. This will result in a drop in market liquidity and the spread between bid and ask will rise by a huge amount. It would not be unexpected to see an instant of a 20 pip spread or more on the EURUSD. You are then stopped out and will incorrectly blame your broker.
[B] Potential for Carnage.[/B]
It is extremely unlikely, but possible that the data shows U.S. employment is so bad that the FOMC needs to reconsider its view on the December rate increase and further increases planned for March 2017. If that happens there will be massive moves in the USD resulting in total carnage to retail accounts.
Guard your position and protect yourself against the price spread and the possible USD swing.
If you are a new trader and do not understand what I have posted then you may want to consider exiting your USD positions between now and the announcement, but that is your decision based on your assessment of the risk, but be aware there is the potential for a major market event, but it is not likely. Similarly your choice of stop loss position should be reviewed in light of the pending announcement.
If you are a new trader and wanting to learn, then watch the USD pairs at the time of the announcement, watch at a very low time frame 5 seconds for example, just observe and learn what happens.
I will assume that your use of the word “account” is in reference to currency pairs, as opposed to the literal meaning of account. If I have misunderstood please clarify your question.
The announcement pertains to the USD, therefore all USD pairs will be effected.
EUR USD
USD JPY
GBP USD
USD CAD
AUD USD
etc.
Since you are a new trader let me ask two questions.
1] Do you understand that it is Central Bank interest rate policies that are the single largest factor effecting currency prices?
2] Do you understand which factors central banks review in coming to a decision on interest rates?
If you have specific questions please post them, not only for yourself, but so that others who are just lurking may gain knowledge as well.
You’re mistaken Bob. I originally posted to object to the tone of ibelial’s 1st post, then thought it wasn’t worthwhile so, as I don’t have a ‘delete post’ option, i replaced the text with …
I never thought it could be interpreted as a dig at Truth so, if you’re reading this Truth, please accept my apologies, no slight was intended
So there was essentially no surprise in the announcement and only minor market movement. However adopting a defensive strategy around that event cost nothing and that is the key to remember for new traders. Defensive trading must be an integral part of your total trading plan.
When there is scheduled major event adopt a defensive posture for that time. Many of the so-called Black Swans are listed on an events calendar. While the content may be a surprise, the timing is not, and that is good enough to allow you to protect yourself. True Black Swans are indeed rare (after all that is the definition of the term) and come with no warning.
Do not become complacent because this single event did not result in drama.
Moving forward, what can be learned from watching the price movement of the USD during the event? The data announced gives further support to an increase in US interest rates. The lack of movement tells me that the rate increase is already fully factored into the price of the USD by institutional traders. It was well known that the bond market had already put an increase at 100%, but this gives me a confirmation that the currency markets have followed suit. The next event (on this specific issue) will be on 14 December 2016 at 14:00 EST when the FOMC announces its decision on interest rates.
Since the increase is already fully factored in, if the increase does not happen, then expectations are not met and there will be market turmoil. On the opposite side, the increase could be larger than expected and cause market turmoil. So once again I will adopt defensive strategies around that specific event.
Why would they not increase? Perhaps Ms. Yellen has different ideas about the state of the world. Perhaps she wants the rate increase to occur after Mr. Trump is sworn into office the following month. Perhaps there will be an intervening event before then. Perhaps, perhaps… all sorts of very remote and unlikely reasons. But since it costs me nothing to protect my account at that time I will take those precautions knowing full well that it is extremely unlikely that they will be triggered.
No apology is necessary, the context of your post, in juxtaposition to the proceeding ones (one of which was vulgar and has been deleted) made the meaning obvious.
Now a clever new trader might ask, “why don’t you just leave that defensive strategy in place all the time?”
Two major reasons:
Because institutional traders have tools that retail traders do not. First, they can see order flow and the pending orders at various price levels. The computer models that they use will indicate when it is profitable to spike the price in the opposite direction to gain an advantage. This is what is referred to as stop hunting. Essentially an attack of institution vs retail.
The other is that an institution will attack based on a feint to another institution. The tool for this is massive liquidity and direct contact with the other institution.
I’ll try to type an example.
Traders at Deutsche Bank and Sumitomo square off. They may be talking on the phone or more commonly now chatting on their Bloomberg terminals. Sumitomo wants to short the yen, so he is speaking with Deutsche and saying that he want to go long the yen (he lies) and offers various reasons and is looking for pricing and large volume.
As they are chatting Sumitomo then has an associate at another desk pop a buy order for $20-50 million on yen. The Deutsche trader sees this trade, while talking and jumps on the band wagon, he goes long.
At that instant the original Sumitomo trader executes his real trade and starts a massive short position with far better pricing at the expense of Deutsche.
This is a vastly simplified example but the idea being that there can be extremes of market movement with no apparent news or event.
In both of these situations my defensive event positions could be triggered without benefit.
Retail traders are mice, and we mice need to get out of the way when the elephants start rolling around.
So in general I have a different strategy to protect my trades during non-event times.
This is a link to part of an interview this morning with Mohamed El-Erian regarding the NFP. I have enormous respect for his views on financial matters and pay close attention to his statements.
