Position Yourself To Trade News Events Profitably
Just quickly following up on an excellent question from a subscriber asking how they can better position themselves before a news event.
Knowing how to position yourself before major news events is really a very critical skill that you need to master for trading in line with the fundamentals. And when you do it correctly, it can really offer you some great high-conviction, high-probability trading opportunities.
Now, there’s basically two ways you can position yourself before an event. You can basically position yourself to trade into a news event, which means that you actually anticipate a price move in the run-up to the event and trade it accordingly, or you can trade out of the event, which means that you wait for it to take place and then you trade it based on how the actual data came out versus the expected data.
Now, whether you trade into or out of events, the first thing you always need to consider is firstly your macro-fundamental bias, then your short-term sentiment bias. And then, of course, the market’s expectations for that particular event.
So the market won’t position itself just for any small or insignificant data point. You want to really focus on the highly anticipated events, events like inflation, GDP, employment, and of course, central bank monetary policy decisions, but only as well if these events are expected to be big movers for that particular event.
Now, for example, employment we know is always important, but it might not be important depending on where we are in the economic cycle, right?
So if you are running at maximum employment, then another employment number in the bigger scheme of things might not just be that important at that time.
The more significant an event is, where currency’s fundamental outlook, the more likely it is that the market will trade into that event. So that’s a very important consideration that we need to take. So let’s use it as an example, right? So let’s say there’s an important US inflation data point that you know will be very important and you want to trade into it.
Now, let’s suppose that you know that your macro-fundamental bias is bullish, you know that your short-term bias is bullish and you know that the market is expecting the data point to come in better than prior. So let’s say inflation prior number was one spot nine and the market expects that to come in at two spot two. That’ll give you a green line to expect a buy or the market to buy the US dollar in the run up to that event. The same for a bearish example. So let’s say you have a bearish view on the dollar.
You have a bearish sentiment by a short term on the dollar and the market expects the CPI to come in worse than expected. That is a great opportunity to trade into that CPI event. Now, in contrast, let’s say the fundamentals and the sentiment is still aligned. So let’s say you have a bullish view in the macro-fundamentals, a bullish in the short-term sentiment, but the market expects CPI to come in worse than prior, let’s say one nine from a prior of two spot two, then that won’t really be an opportunity to trade into that event.
Then you can look for a possibility to maybe trade out of that event. So turning to trading out of events, imagine that we’re still looking at that upcoming US CPI event, you know that your macro-fundamental bias is bullish, your sentiment on the dollar is bullish, but the market is expecting CPI release to come in softer than prior. So let’s say it’s expecting the data points to come in at one spot seven versus a prior of one spot nine.
Now, we can’t trade into that event because the expectations for the event isn’t aligned with the macro-fundamental or the sentiment bias. But we might have an opportunity to trade out of it depending on the actual data.
So imagine that the CPI, when it gets released, it actually comes out much better than expected. So market expected it to come in softer, so it expected it to come in at one spot seven from a prior of one spot nine, but it suddenly comes in a two spot two, a very big jump. And that’ll give you a great opportunity to trade out of the event because you already know that your macro-fundamental bias is bullish, your sentiment on the currency is bullish.
And now you had a positive deviation with a bit much better than expected in terms of the data point. And that is usually gonna be the best opportunity for you to trade out of a news event. Now, taking a bearish example is exactly the same.
Let’s say you have a bearish macro-fundamental bias, you have a bearish sentiment bias, but the market expects data to be better than prior. You’re not gonna trade into it. But if the market expects it to be better and it comes in with a much worse than expected number in line with the macro-fundamentals in the short-term sentiment, that creates a great opportunity for you to trade out of that event.
Now, the other time when trading out of news events can be useful is when the data or the event actually changes the bigger fundamental outlook for the currency.
So think of a central bank policy decision, right? So suppose that the market expects the central bank to basically leave rates unchanged for the foreseeable future. And then at the central bank meeting, the statement is released and the bank takes a tremendously dovish or hawkish stall by basically saying that a rate cut where rate hike is on the cards in the next six months or so.
Now, that’ll take the expectation from a central bank with no expectations to move on rates to suddenly a central bank that is not expected to move rates with the hike or cut in the next two quarters. Now, that type of shift will obviously change the fundamental outlook and is also a great opportunity for trading out of events.
So this is just a quick guide on how you can better prepare yourself before news events.
For those of you watching, if you want this document, just take a quick screenshot of it maybe, save it somewhere that you can always reference it.
And always, just again, important, have those three things in mind, have your macro-fundamental bias align, your short-term sentiment bias align, and then of course, what the markets are expecting from that event always gonna be your most important criteria for choosing whether to trade into or trade out of important news events.