How to Correlate Price & News
While news can cause price movement, price can cause and affect price movement. In trading, the vast majority of people are programmed into thinking they need to find out why something occurred. They believe it’s essential to first understand the cause of the behavior; while a smaller number aren’t interested in the cause, just in taking advantage of the affect. This dynamic plays out in the market place every day. Retail account holders spent an inordinate amount of time reading reports or listening to analysis prepared by brokerage firm strategists, while prop traders in Chicago, Singapore and London following specific technical strategies routinely take their money. Too often beginning traders fall into this trap of thinking they need to somehow predict what is going to happen next, instead of taking advantage of what is happening now. Until you understand that the past is gone, and you will never be able to predict the future, you will not learn to avoid the trap of form-fitting news to day-to-day price movement; or just as bad, listening to talking heads form-fit it for you.
For the sake of simplicity let’s only cover the subject of sorting price and news on an intraday basis. The good news here is the timing of news is almost always known ahead of time. You need to understand that it’s not so much the news, but the timing of the news which is key. The different organizations and agencies responsible for this information are very good at scheduling and releasing the various reports that most affect the market-place. There is no reason not to know exactly when these influential releases occur. Now I know there is a slice of the trading population who will say that “you can’t trust the news”, insisting that governments will withhold information or slant reports. To this I say: “so what”. Even if that were the case it doesn’t matter to us, given the way we collate price and news. Most calendars designate the releases by importance. Our favorite news site, forexfactory.com denotes influential numbers by coloring them red. As I said the release times of the major reports is always known, therefore we exit intraday trades just ahead of any number we deem important. Likewise we don’t look to get back into the market following a number until price action – the candle – settles. If the news obviosuly dovetails w/ the existing trend we may get back in the market quicker by waiting for the candle on the lower time frame chart to settle– for us that would mean the 3-minute, or even 1-minute chart. If the kneejerk reaction is counter-trend, which was most often the case last week, then by waiting for the higher time frame candle to settle, in our case the 15 minute candle, we avoid the slop and leave ourselves refreshed and focused on the next set-up.
The key is to never, ever anticipate a news release, and to always take down the ships sales ahead of the major releases. A great exercise also is to go back over the last couple of weeks or so on a 15-minute chart w/ the forexfactory.com calender open and see how many times major news releases actually influenced price by changing the existing trend an hour after the news hit the market. You should see that it doesn’t happen nearly as much as you would initially think. Bottom line: the trend is still your friend.
Jay is the author of Mastering the Currency Market, McGraw-Hill, 2009, host of the Daily Forex Report on ForexTV.com
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DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.