Trading an Economic Report

           Since plenty of traders including myself look for spots of increased volatility to make a quick move, I figured I’d put together a post about to set yourself up for a successful trade after an economic event or report.  On the eve of the May NFP’s, it seems appropriate.

           In my opinion one of the most important things to gauge before an event is the expectation of the markets.  Just about anywhere you find an event calendar, you can find a value economists have determined to be the ‘expected’ result of an event.  Tomorrows NFP number has had a general expectation of +170k, but many have already agreed that there’s a good chance the report will come in much lower than that.  Many estimates have already been updated to reflect a lower expectation since this week’s poor ADP numbers (probably closer to +125k or less), and the market has been processing these expectations.  Now let’s say that the actual number comes in around +100k.  While this is much less than the originally anticipate +170k, you might not see the reaction you’d expect when a number as important as the NFP’s comes in that much lower than expectations.  This is because the market has already accounted for much of the difference.  By understanding the true market expectations, you can prevent yourself from getting on the wrong side of a freight train.

           Another thing that’s almost guaranteed to rip you up is trying to anticipate the market’s reaction and get in before the event.  This is basically gambling in my opinion, unless you have some sort of strategy for doing it.  Even if a report comes out exactly how you expect it to, the market doesn’t always act accordingly.  It’s much safer to let the initial kneejerk pass before trading.  Even if you miss the initial move, there usually are plenty of opportunities to safely enter and profit.

           Understanding the event is another key to success.  Different events often have different types of reactions for different pairs.   Some events cause pairs to take off within seconds of the release and never look back, while others take 10-15 minutes to really pick a direction.  For example, the most important part of the RBA minutes is the last sentence, so you might not see a real reaction until the report is fully read.  Also know what pairs will be in play after a report.  You probably won’t see as much volatility trading a yen cross when the BoE announces new rates. 

           Identify your key levels before hand, prepare for all possible scenarios, and understand overall market sentiment.  Be patient and get good entries, but don’t be hesitant or you will get left behind.  There is plenty of quick money to be made trading off events, so you have to know how to take advantage of them.

          Below is a 5 minute chart showing how the EUR/USD reacted to the April NFP's that came out last month.  HUGE move.  I'm pretty excited to see what happens tomorrow morning.  Good luck to everyone trading it!

EUR/USD, 5 min, 5-6-2011