Forex Trading Articles
TRADING THE NEWS
(PART I)
By Teresa Burnett for Forexmentor.com
©
2007, Currex Investment Services Inc.
Jan 29, 2007
In this series of articles we will explore trends, in particular the large up or down trends that form in the aftermath of news announcements and the opportunities these trends provide to trade currency pairs.
I divide these quick, steep trends that form in the aftermath of the news into three phases which are detailed below.
Phase One: The launch or the collapse
In the volatile first seconds after a major news announcement a currency pair can move an unbelievable 20, 40, 60 or more pips in just a few ticks.
As price rockets up or collapses, the technical indicators such as the MACD follow and get pulled to extremes. Illustration 1 shows examples of a rapid increase and decrease in price and the resulting extreme angle and separation in the MACD indicators.
Illustration 1
Phase Two: Consolidation
After a steep up or down price movement following the news announcement, the panic and euphoria will eventually subside and price will usually consolidate. When in a consolidation, price is range bound, i.e., not making higher highs as in an uptrend nor lowers lows as in a downtrend.
Illustration 2 depicts the characteristic smooth wave that forms in MACD during the consolidation phase. This smooth wave is called MACD neutralization and it is most commonly seen in the 60 minute and 15 minute charts. However, MACD can neutralize in other time frames as well.
In the left chart in Illustration 2, after an increase in price, MACD neutralizes down to the waterline (the zero line where the histogram is plotted). In the chart on the right, after a decrease in price, MACD neutralizes up to the waterline.
The MACD neutralization wave will usually reach to the waterline. However, MACD can show variations such as slightly exceeding the waterline as in the first chart or not quite reaching the waterline as seen in the second chart in Illustration 2.
Illustration 2
Phase Three: Reversal or Continuation
After a consolidation, which can last a few hours to a few days, price will either continue in the direction prior to the consolidation or reverse.
These price reversals or continuation moves after the consolidation phase can be just as dramatic in terms of price movement as was the first phase immediately following the news announcement (Illustration 3).
Illustration 3
In this series of articles we will focus primarily on trade setups after the consolidation phase: the reversal or continuation phase three. These trade setups present good trade opportunities without the high risk and volatility of the initial price movement immediately seen after the news in phase one. However, we will explore several high probability trade setups that occur during the first two phases in later articles in this series.
Strategies for Trading the Aftermath of the News
The “recipe” for trading these dramatic trends following news announcements is to use the extreme angle and separation that forms in MACD after a large price movement and to use the relationship that forms between the MACD indicators plotted in several different time frames. Briefly, we will look for MACD in three time frames to cross in the same direction and will time the entry point with one or two other indicators such as the Stochastic or the Bollinger Bands (Illustration 4).
Illustration 4
In the following sections we will explore these types of trade setups shown in Illustration 4 in greater detail, examining both up and down trends and the continuation or reversals in each. For more information on these trade setups, ForexMentor members can access these links:
August 29th AM Review with Peter Bain highlighting trade setups for post news up trends.
ForexMentor Members Library trade setups for both post news up trends and post news down trends.
Proceed to the next section
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