Sometimes trading can be so easy.
Your positions swim along nicely, just as you predicted. You can sit by, happy as Larry, as they approach your profit target.
But sometimes, good trades misbehave. When they should go down, they go sideways. Or worse, they go up.
Take the AUDUSD last week for example. There were three surprises that should have been negative for the pair:
- The RBA cut rates, when it was probably a 50/50 call
- The Non-farm payroll data in the US was exceptionally good
- China surprised with negative trade data
I won’t get into the intricacies of these announcements, but needless to say, on balance, they were bad for my Aussie mates across the Tasman.
The response, though, was not as expected. When the RBA cut rates, the price rebounded and a reversal pin candle formed (bullish price action). Though it sold off, there was a weak reaction to the US data. Finally, the price recovered quickly from the weekend gap down that occurred after the Chinese trade data.
Something is going on that I just don’t know.
When good trades go bad
When you are trading, you want the price and news to play nicely together.
If you are short and there is bad news, you want the price to go down. If you are long and there is good news, you want the price to go up.
When the reaction is at odds with the news, it’s time to take stock of your positions. If you get bad news and the price does not go down (or vice versa), it’s time to zoom in your focus, and really activate your intuition. This could be a sign that a reversal is on the cards.
For some traders, this will create enough uncertainty to exit their position. Those who don’t exit at this point should be alert, or trim their positions, depending on their objectives and trading horizon.
Time for an experiment
So, back to my friends across the ditch…
Will this bullish price action in reaction to negative news events be a precursor to a reversal in the currency pair? Or is the Aussie just being stubborn on its way down?
Here is an interactive chart of the AUDUSD. If you click the play button, it will move the price forward from when I initially created it earlier today. You can give it a try.
We can check back in time and see our results.
Notice the reaction to the news
The broader point of this experiment is to encourage you to notice and contemplate the reaction to the news.
You don’t have to be an expert yourself. There are plenty of analysts you can follow (like marctomarket) who can tell you if the news is good or bad, and if it was a surprise or not.
You also don’t need to watch the news live. Just look at the calendar of upcoming news events and determine which ones are of significance. Then, just make sure you check the charts and read about them the day after.
You will then get an indication of what it means to the pairs you are trading. Once you’ve been studying and analysing reactions for a while, you will start to develop a finely tuned sense of what really drives price action in your pairs.
Until next time,
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter.