Trading the News: Non-Farm Payrolls, October 6th 2006
Why Does The Non-Farm Payrolls Report Cause Volatility? The NFP generally falls on the first Friday of every month and offers an insight into the health of the US labour market. A healthy labour market is an important driver of consumer spending which, in turn, stimulates economic growth and prosperity. The health of the US economy is directly proportional to the strength in value of the US Dollar. This grabs the attention of banks and individual speculators alike. Therefore, few markets feel the effects of this data release like foreign exchange, especially the dollar currency pairs such as EURUSD (Euro vs. US Dollar) and GBPUSD (Great Britain Pound vs. US Dollar). What Were We Dealing With? Price reaction to a Non-Farm Payrolls report can vary from a uni directional rally to a mess of chop with no clear directional bias. Given the choice every trader would love to see one-way traffic every time but as we know that is not a reality. On the day in question we saw a brief, but rapid dollar sell off, followed by a sudden directional change. This resulted in a nasty whipsaw. We will go into the reasons for this below. (Images http://www.passion-trading.com/Articles.TradingTheNews.NonFarmPayrollsOct2006.htm) Why Did This Happen? The NFP report on Friday 6th was a tricky one. The headline figure came it at +51 000, the lowest figure since October 2005. With a poor figure such as this one you would expect a dollar sell off and we can see this in the spike higher on the EUR and GBP pairs. However, this move faltered quickly as traders realised that the previous month's data had been revised upwards from 128 000 to 188 000 new jobs created. Coupled with a lower than expected unemployment rate (4.6% vs. 4.7% expected) speculators turned dollar bullish forcing the EUR and GBP exchange rates lower. It goes without saying that this whipsaw was almost certainly caused by those traders who opened positions based on the headline figure alone, and by those who followed this initial burst of momentum. So, trading the data in an economic release requires you to be aware of the full report before opening a position. This leads us nicely to our next point. Trade What You See, Not What You Think "So what if the Non-Farm Payrolls data was revised higher for last month, this month's data is terrible. Anyone going long Dollars now is a fool, I'm selling the Dollar across the board. It will move with me again in a minute." This is the typical chain of thought for any trader who trades what they think and not what they see. In fact some of you reading this may have thought like this on Friday! Be warned, the market is never wrong. Countless individuals (and a few corporations) have lost their shirts because the market was moving in the 'wrong' direction and it 'would turn around at any minute'. As a trader it is your job to follow the market and work with it, even if you think the price action does not reflect the latest fundamentals. (A classic example of this is the dotcom bubble in the late 90s. Many traders correctly identified that the dotcoms were way over valued but began shorting too early. If they had waited for price action confirmation their analysis would have been massively rewarded by the sell-off that eventually took place.) Trading what you see would have allowed you to identify the high momentum reversal (from the post data high of 1.2708 on the EURUSD). Technical traders will know that reversals such as this act as strong resistance. Therefore dollar shorts would represent a riskier position, at least until the resistance had been overcome. If the price action of Friday the 6th had you completely foxed and you didn't know what you were seeing then the best course of action would be to sit out. It is worth remembering that you never have to trade. The market will be here tomorrow and there will always be another opportunity. As a trader your objective is capital preservation and you cannot achieve this by trading for the sake of it when you are unsure as to what is happening in front of you. Pinpoint Your Entries and Define Your Risk Trading what you think may leave you in the mistaken opinion that the market is moving in the 'wrong' direction. In this instance your capital is in great danger unless you define your risk. If the market moves against you and you do not have a stop loss (hard or mental) in place then you cannot cut your losses or move on. The Payrolls price action in question could have been very violent for anybody in this position. Those trading on the headline figure alone could have seen a maximum move against them of 144 and 205 pips on the EURUSD and GBPUSD respectively. Any trader short the dollar, without a stop loss, based on the headline figure of +51k was playing a game of 'catch the falling knives'. This highlights the need for a trading plan. If you plan your trades, in terms of risk and entry criteria, in advance then there is no need to open positions based on your ego or emotions. If your trade is a loss, it's a loss, time to move on and plan your next trade. If you feel your emotions coming into play then walk away for a while and concentrate on something else. Remember the market will be here tomorrow but your capital might not. Just Because the Market is Moving Quickly it Doesn’t Necessarily Mean That You Have To When you are learning a new skill and you want to improve you always attempt to work out of your comfort zone. However, the same does not apply to trading. Payrolls data nearly always brings about rapid directional movement. On occasions such as this it is natural to want to jump in early and catch as large a move as you can. Now this is all well and good if you have planned your trade in advance, you know your entry zone and you know where to cut your losses should anything go wrong. If you feel as though you are rushed or forced into making a decision then it will more than likely be against your best interests. For this reason many traders prefer to give the market time to settle down after data releases. This extra time gives the trader an opportunity to assess the direction of the price action and establish new entry points. We can see an example of an opportunity to do this on Friday. Based on the example of the Non-Farm Payrolls report, Friday 6th of October 2006, here is a recap of the lessons you can learn: • Non-Farm Payrolls are notoriously volatile
• The figures are highly anticipated by the foreign exchange market which causes massive volatility
• Post data release; price action can take the form of a uni directional rally or directionless 'chop'
• Make sure you are aware of all data in a report and not just the headline figure
• Disregarding the news completely and focusing on the price action can remove bias from your trading. Thus, improving your decision making
• Trade what you see, not what you think. The market is always right so don't fight it
• You never have to trade. The market will be here tomorrow but your capital might not
• Never trade based on ego or emotions
• Aim to trade within your comfort zone
• Plan your trades and take your time to identify entry points and define your risk
David Thorpe writes articles for http://www.passion-trading.com This site is dedicated to bringing you free resources that will allow you to develop your learning and better manage your own money in the financial market. |
Other Currency Trading Articles
How Does the Exchange Rate Exactly Works The exchange market mechanism can be pretty confusing for a person who doesn’t have specialised knowledge in this area. The connection between the exchange rate of a currency and its trade deficit may seem like an undecipherable mystery. In order for you to understand the hidden mechanism of the exchange market and the trade deficit, we’ll discu ...Predicting the Market Using Gann Angles - An Alternative Slant on Market Timing W D Gann was a prolific writer and trader, and created a fortune of over 50 million dollars (equivalent to 500 million today!).Many of his trading predictions were the subject of public record. For instance, he correctly predicted the 1929 crash a year in advance!Gann died in 1955, but he still holds legendary status as a technical ...Stock Market Day Trading Stock market day trading is a great means of making money with a little of gambling. You have to have some strategy to follow when participating in stock market day trading. However, once you enter into stock market day trading, you have to be ready to devote your life to it, as you practically become married to the stock market.The stock ...FOREX Trading - The Secret to Making Profits from the Big Moves In FOREX trading, it’s a fact that many traders simply can’t let their profits run - they enter trades correctly, but only ever, bank marginal profits.“Let your profits run” is accepted market wisdom - but how do you do it in practice? How do you maximize your profits?Many FOREX traders get in on a good opportunity, and take a marg ...Currency Trading Seminars A seminar is a workshop conducted with an intention of teaching the audience about a subject. Currency trading seminars are basically helps advise the traders or potential traders about the subject. Seminars could address any issue that affects the market.The forex market is an attractive short-term trading option and, because of its low ...Selling Information on the Internet My far the hottest money making trend on the Internet is selling knowledge in the form of e-books including digital audio and video. Most people use the Internet to do research, gather business intelligence, find fun things to do, indulge their hobbies or as a medium for the exchange of information via e-mail. The idea behind this new business ...Commodity Day Trading Commodity day trading most commonly refers to the practice of buying and selling stocks during the day. By the end of the day, there has been no net change in position. For every share of stock bought, an equivalent share is sold. A gain or loss is made on the difference between the purchase and sales prices.Studies have shown that the mo ...Forex Trading: Calculating Profit and Loss in Foreign Currency Trading The foreign exchange market, or Forex market, is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. The value of your Forex investment increases or decreases becaus ...Forex Beginners Guide - Learn How to Trade in Forex Market from the Basics Today’s Forex trading is well known as a lucrative way to make money online. It became an essential part for investor’s portfolio as you can simply gain thousands in minutes by trading currencies at home. For those who are new to the trade, Forex means Foreign Exchange Market where it involves buying and selling the different currencies of the w ...Forex Trading – Three Great Reasons to Start Currency Trading Most people shudder at the thought of Forex Trading because they think that it is very high risk trading because of the great amount of leverage involved. However the money making potential in Forex Trading is huge when compared to other financial instruments worldwide.This article will highlight three great reasons why you should consid ...Forex Strategy: How The MACD Indicator Can Save You Anxiety The MACD (Moving Average Convergence Divergence) indicator can add a degree of certainty to your Forex strategy.As with any indicator, it is too risky to enter trades on this signal alone. However, as we will see, used with caution on higher time frames, it can help confirm you are going in the right direction and that your trade is highe ...A Guide to Discount Brokers Discount brokers are individuals or companies that carry out trade executions for a variety of trades. In other words, they execute buy and sell orders at a lower commission rate.Discount brokers can be categorized as discount stock brokers, discount commodity brokers, and discount real estate brokers. Discount stock brokers open endless ...Arbitrage Trading or E-currency E-currency? If you are reading this you most be wondering what way is better to make money E-currency Exchange or Arbitrage Trading?Lets first look at how both systems work, and if these systems will still be around in 5 years or so.Arbitrage Trading Is and unknown way to make money on the Internet. Very few people know little or no inf ...Forex Guide The term Forex is the short form of Foreign Exchange. Any type of financial instrument that is used to make payments between countries is taken to be foreign exchange. Electronic transactions, paper currency, checks and signed, written orders called bills of exchange are all instruments of foreign exchange.Forex indicates increased or dec ...Trading Tips No 1: Learn How to Trade The Moment of Truth So you have learned how to trade the markets by mastering a few trading tools like Moving Averages, Channels, Stochastics, MACD, or RSI - that is a great accomplishment achieved by only a few. However, having the tools and rules to trade markets successfully, year in and year out, is only half of the challenge. The other half is far more dauntin ...Make Money Fast – The Secret Of Catching the Huge Trends & Profits If you want to make money fast trading you need to catch the big trends and hold them. Most traders fail to catch the moves and if they do, they then fail to make the most of them.Follow the advice here and you can catch the big trends and make triple digit gains.1. Understand the long termMaking money fast is all about taki ...The Rubber Band Forex Trading System Of the many trading methods available out there there is one that has been recently realized and that is amazingly simple and uses the forex trading platform of your choice. This trading method will show you how to build your own indicator suite based on the author's recommendation, but this method is not only colored screenshots, it will allow ...Forex And The Anatomy Of An Elliot Wave As you enter the world of Forex you will immediately feel the basic need all Forex traders have: A method or technique to forecast the market behavior with the highest possible accuracy.There are a number of methods and techniques that traders have researched through the years with this goal in mind. These techniques are based on differen ...DxInOne: E-Currency Exchange Money Making System Not many opportunities online have the ability of assuring to bring you an income. It could be hard to have a clear picture of how the system works when you are starting, but when you know how the DxInOne E-Gold system in reality operates you will start to see that generating anywhere from 2 to 4 percent in daily interests is not that hard, in e ...Trading Forex Currency Trade is basically defined as an exchange of goods or services at an agreed rate of exchange (e.g. two apples for three oranges). And in the same way that apples and bananas can be traded, currencies can also be exchanged for one another.Foreign Exchange or Forex currency trading involves buying and selling one currency for another at a ...Just What is Currency Option Trading Some people, when they hear about the currency market, they only think about the foreign exchange market. Rarely do you hear about the other side of currency trading which is known to some people as currency options trading.Currency options trading involve selling and buying the rights to buy and sell a certain fixed amount of a currency ...Bold Insights on the Euro's Performance in the Forex Markets " A smooth sea never made a skillful mariner!" - Quote by an Addicted forex TraderThe forex, also designated the foreign trade market is the largest and greatest liquid exchange market in the planet. Unlike the stock exchange, the forex does not suffer a specified trading location or termination period. Instead, over $2 trillion are trade ...Advantages of Trading FOREX Over Stocks and Commodities There are many advantages to Trading FOREX as your main income generator. Let’s start by something that may be worrying you already.“Do I need a Diploma or some kind of Certification to trade FOREX?” The answer is this:When attempting to make more profit than losses on the fluctuation of exchange rates between major currencies (i.e ...Option Arbitrage in the Forex Market What is arbitrage? Arbitrage is the simultaneous buying and selling of identical financial instruments taking advantage of price discrepancies between different brokers, exchanges, clearing firms, etc. and thus locking in a profit. On paper, arbitrage is a risk-less trading strategy. In the real world however, risks abound.So why trade ...
|
