Making Sense of the News

Trading Discussion News and Economy
1

I always figured trading the news would be the most rational way to go about trading. I found a good Forex news website and checked out the latest news. Apparently the Australian Construction of Dwellings came out at 9.4%, but was only expected to be 6.0%. Both are a rise from the previous -3.7%. I would imagine this would make the AUD/USD pair go long (up, right?), but within the minute that it was released, it dropped 200 pips! 8.5 hours later, it is down 1000 pips. I am thinking that I misunderstood something, or the market is behaving not as expected. I would hope it’s the former.

Tell me if any of these assumptions are wrong. I am looking at AUD/USD, so that means it is a representation of how many Australian dollars are worth vs the American Dollar. The Constitution of Dwellings came out better than forecast, so this means the strength of the Australian economy is stronger than expected. I would assume that this would make the AUD/USD rate go up…BUT IT DID THE EXACT OPPOSITE.

On his daily report, Pipdaddy says “The Aussie, however, still lost some support following the release.” so it would imply that I am right in assuming it reacted not as I expected. But WHY?!

I am thinking there are a few theories to explain this:

  1. I totally misinterpreted something, such as the AUD economy is actually rallying.
  2. For some reason, the news release actually entails the AUD losing value, like it causing inflation.
  3. Even though it was stronger than the forecast, it wasn’t strong enough to gain the confidence of traders.
  4. The market is behaving irrationally for some reason.

Can someone explain this to me it is so confusing!!! :confused::(:mad:

2

FOREX markets and other markets are psychology-driven. Information-flow and news prints are responsible for it.

Psychology-driven markets are not rational. – Period.

If you are assuming trading the news without being part of information-flow you are bound to get your “head handed to you”. You don’t stand a chance because you don’t have either software, trade set-up, risk and trade management nor relevant priority information that drives the market at those particular times. There isn’t anything more to explain, really.

3

I too would like to understand this as i have trades on the AUS/USD that i have been stuck in for some time now (3 - 4 Weeks) because it has gone the opposite way.

Please i know if i had used correct MM skills these trades wouldn’t be that way so don’t need a lecture. Still finding my feet and actually enjoy long term trading. Lucky i have the margin to be able to hold these positions so not too worried but to understand these things would be fantastic.

After the first interest rate increase the dollar shot up. Then the second one it went down…??? Recovered but went the opposite way. Why

Cheers for asking this TakeDat let hope we can get some real insight into why and how and maybe the best way to look at this stuff when using it to make judgment on the market.

Used. What do u mean by “information-flow”?

Thanks in advance
Evad

4

What do u mean by “information-flow”?

Information-flow is the transfer of information from a variable to another variable in a given process.

The given process on FOREX markets is price.

The measure of information-flow is defined as the [B]uncertainty[/B] [U]before[/U] the process started [B]minus the uncertainty[/B] [U]after[/U] the process has terminated.

AUDUSD pair dominant price flow was uncertain before the process started and is still uncertain after the process has terminated.

AUDUSD pair dominant price flow went the other way and it has not corrected itself because of prevailing uncertainty.

You don’t shift the amount of volume necessary to neutralize prevailing uncertainty in the AUDUSD pair and correct dominant price flow. All you can do is hope and pray for that you don’t get a margin call.

let hope we can get some real insight into why and how and maybe the best way to look at this stuff when using it to make judgment on the market.

Stay out of the markets because of the reasons I have given in my two posts.

5

Used is right about the uncertainty. You don’t know and can’t know what the reaction to news will do to price. You can’t even predict how much of a reaction will happen. So look at straddle strategies I don’t like them, to much of a chance both your stops will get hit and then a move will start. What I do is pick one direction based on my [B]best guess [/B] I enter one trade a few minutes before the news I put a tight stop and hope it goes my way. I close out when price slows down. Its a gamble some times it pays out nice other tome stop gets hit. Watch the spreads before you do anything!! If my stop gets hit I wait for a correction after the news.

This is all very high risk use small lots expect to be stopped out often, you are looking to get in a big move and out with out the spread and slips wiping out your trade.

I wouldn’t even waste time trying to predict what a certain release will do to price just come up with a way to trade a fast moving unpredictable market if you must try to trade news.

6

If “traded markets” were rational the best trader would have already won all the yellow jerseys and gone home with all the cash! Like Lance Armstrong and tour de France bike racing or Tiger Woods and girlfriends!

Science = rational behavior
Traded Markets = irrational behavior :slight_smile:

If you get a chance watch when quarterly stock earnings are released and follow the market moves afterward, not always rational.

thanks!

7

What you mentioned about information flow is intriguing. I looked it up, and read a very similar definition. I am still unsure as to the meaning. Do you think you could explain it further?

8

News is like head and tail game…and if you really think that you can predict accurately based on the news you are wrong.

No matter what news comes out whether it is bad or good…still the direction of the currency market movement will not follow. Only certain occasion it does.

9

Let’s take the AUDUSD pair as an example.

Apparently the Australian Construction of Dwellings came out at 9.4%, but was only expected to be 6.0%. Both are a rise from the previous -3.7%.

That’s the news print. [B]AUD positive[/B].

I would imagine this would make the AUD/USD pair go long (up, right?),

For the crowd outside information-flow it is supposed to look that way. :wink:

but within the minute that it was released, it dropped 200 pips!

That’s where information-flow get’s to work.

[I]The measure of information-flow is defined as the uncertainty [U]before[/U] the process started [B]minus[/B] the uncertainty [U]after[/U] the process has terminated. [/I]

The positive AUD news print was already priced in. No more rise on the upside was expected and the AUD sell orders were hitting the market because the big players were getting off when the rest of the crowd was getting in.

[I][B]uncertainty before the process started[/B][/I]=big players waiting for news print before hitting the SELL button

[B][I]uncertainty after the process started[/I][/B]=rest of the crowd hitting BUY buttons because of AUD positive news print

8.5 hours later, it is down 1000 pips.

That’s where information-flow keeps working.

Big players getting out and rest of the crowd getting in=stops of the rest of the crowd gets hit=AUD falls

trader orders placed inside of systems to SELL when price hit a certain level=AUD falls further

more stops get hit & emotional crowd jumps off because they are getting scared=AUD falls further

forward transactions getting filled because AUDUSD spot price hit desired level where a SELL order is filled=AUD falls further

…

Where does it end? Nobody knows because of information-flow.

At a price level seen as attractive to big players the SELL OFF will be reversed with the same result to the crowd as above.

You can protect yourself in changing your thinking about FOREX trading and start to focus on the things you have full control over instead of trying to predict what news prints will do to markets. Accept the uncertainty of markets and control your risk at all times you are exposed to the markets.

10

I always figured trading the news would be the most rational way to go about trading.

When I first started out I guess I was lucky enough to run into millions of warnings about trading during news due to market reaction to result vs actual result of release. As the months passed I noticed that there was a relatively consistent pattern, much as used has described - almost every time there was a significant news release with a supposedly bullish Forecast (or even just announcements with no real forecasts) there’d be a more or less trickle of bullish build up toward the event marred by sudden chunks of bearish movement sometimes throughout the hour leading up to it but almost always in the few minutes before and/or during the actual release. One would be wondering how someone would instantly interpret a speech or meeting as good or bad until you realise that the newbie warnings are there for a good reason, it’s all just the larger players (and/or a combination of alot of smaller ones) playing the sentiment game, profit taking on the bullish rise and running rather than only taking a pure gamble at the release.

On the specific trade you were after:

  1. For some reason, the news release actually entails the AUD losing value, like it causing inflation.

Bearing in mind my limited macroeconomic background from what I understand of A/U as a carry pair, inflation would actually serve to spur RBA rate hikes and resultant attraction toward the pair based on an increasing interest rate differential and thus yield for those interested in the carry anyway

  1. Even though it was stronger than the forecast, it wasn’t strong enough to gain the confidence of traders.

That’s pretty much it

  1. The market is behaving irrationally for some reason.

Rationality can be a fairly perspective-variable thing sometimes, what’s good news to Australia doesn’t necessarily mean good for aud/usd. The market is driven by people (& robots by people) reacting to whatever event/news is there in order to secure a profit. Given the amount of players in this game with different agendas to get that profit, the rules of rationality in this context certainly aren’t going to be purely based on an elementary good for country -> bull for country sort of mechanism. (Obviously came to that conclusion after the fact of course)

Although I’d agree that pure news trades are dodgy (that is a trade initiated only on the basis of a news release) if you cover your a** well enough as Shr1k’s post, you can do fairly well if the news release happens to go your way. Personally I tend to only use the forecast sentiment (or profit takes off it) as a weak guideline and if I’m in the middle of a trade when the release is due it’s a tight trail stop - either I’m kicked out early or win bigger, not a bad trade off (with my broker anyway, haven’t really had an issue with slippage on sl’s)

At any rate having had my fair share of news trades I definitely wouldn’t have put much faith on this one. While there’s alot you can read and be told about the theoretical concept behind it (usually surmounts in not trading them) here’s some practical ideas to consider that I hope will help you out if you’re dead set on continuing with it. Just to let you know I still use this sort of information to help get a bit of an idea of what to expect if I am trading around news time but using an alternative trigger/signal/strategy in general.

a) Calendar grades - What calendar are you using for your news trades? Forex Factory tends to have a fairly reliable grading of the impact, as a ‘yellow’ report one wouldn’t expect it to be too profitable in the first place. Reading the description for that one: “Tends to produce a relatively muted impact because the tightly-correlated Building Permits data is released monthly”

b) Historic chart data - as a rule of thumb (more like just a rule) if I’m ever going to be in the midst of any significant news release I’ll always check previous releases of the same type to get a rough idea of the pip movements based on mild/incredibly positive/negative forecast & result, both during the buildup toward the event due to forecast and during the actual release, keeping an eye out for any consistent effects (always immediately bearish no matter what the result is can tell you alot). The length of the impact can also be gauged although this is a little dodgy given that often it’s another event that removes or enhances the effect. Consistently whipsaw-prone events are something you want to be staying away from unless you have a very decent fast-order-filling broker. Major problem back-referencing is sometimes there’s ‘corrupt’ data tainted by another or in a worst case scenario stronger news release or event occuring during or around that time. However there’s plenty of previous reactions to choose from for most releases so it isn’t usually a problem. Then again there may be a difference between economic climate and pair characteristic during that particular time to current behaviour. In these situations if the glass is THAT foggy you’re going to want to stay out, unless you want to use a close/affordable stop loss and toss a coin.

c) Experience/Common sense - I think this would be best illustrated by your unforunate encounter with the aud dwelling business

As mentioned above, if there’s another potent news release that people will be reacting to at the same time in the past, it’s going to be hard to discern the effect of the one you’re actually looking at. Naturally this holds true in the present; if there’s two news releases of fairly even or greater effect and the one you’re looking at is the weaker one, you’re not gonna stand a chance chasing the result no matter how ‘rational’ the move appears to be.

I found a good Forex news website and checked out the latest news. Apparently the Australian Construction of Dwellings came out at 9.4%, but was only expected to be 6.0%

If the site was that good it would have surely shown that the AUD Monetary Policy Meeting was on at the same time, something that tends to be a huge kicker by AUD standards (causing ~20-30 pips of movement; that’s 200-300 points on a 5 decimal read as you appear to have on your platform). How would you compare that to the effect of housing starts? Given that it’s a bit of a bi-directional sort of volatility (mostly bearish upon release), either take a quick gamble on the immediate profit take with the rest of your hedge fund friends or whoever they are, or the safer option would be to leave it and move on. Turns out that housing starts tend to deliver a fairly bearish/stagnant sort of result with smaller increases of 2-3% than forecasts so bearish would have been the right move - easily confirmed in hindsight of course.

8.5 hours later, it is down 1000 pips.

It’s a little unnerving that you’d consider such a relatively minor news announcement to have such a potent effect 8.5 hours later given the amount of stuff that occurs in between. I agree with used’s description of what happens in general but definitely not in context of this particular announcement. Alot can happen in 8.5 hours, and this imo certainly was only a tiny contributor to the subsequent bearishness profit taking included*. As it turned out the RBA Monetary Policy Meeting only pointed at future flexibility of IRs so it was more or less disappointing that the next rate hike might be a while off. Gold began selling off from ~1128 to 1112 along with a major EUR/USD dive as it broke right through the november low, all in all either resulting in or the result of a rather significant USD rally (or a correlational move) that was hardly triggered by a sell off from positive AUD Home Starts.

All that is easy to point out during the retrospect and while it wouldn’t have been very feasable (at least for me) to expect such a radical 100 pip move in those following hours while sitting behind your screen at say 2200 GMT 14 Dec prior to Housing Starts based on the news announcements alone, considering some basic factors (mentioned under a, b & c) would have definitely changed your mind about a trade running long

Just out of curiosity, did you actually end up taking the trade?

*Have a friend who was tanking A/U from a ~91 entry months ago so I was keeping a relatively close eye on it - he eventually had to stick it in at 88 because he wasn’t inclined to use a stoploss even when it had gone past 93 - talking margin call

11

The problem with the news is that we as retail traders never move the market, and the ones that do know the news before us.

In a 5 trillion a day market, we are a pittance at 2% thereof, with absolutely no bearing on this carnival ride.

Depending on the importance, I usually try to be flat for the announcements, and then wait on a signal from my system after that.

I’ll get another thousand opportunities, but I may not get another thousand dollars to play with.

12

I’ll get another thousand opportunities, but I may not get another thousand dollars to play with.

That was really nicely put

13

Thanks for your detailed posts.

Daily FX dot com. (hoping to be spared from the moderators policy of giving infractions to outside links.)

No, I was just looking back at it. I am still in my demo days anyway.