Mario Singh talks about different forex strategies at his site Askmariosingh.com.
Successful forex trading takes into account all factors that contribute to market movement. While conducting technical analysis is a good way of trading, it is just one aspect of formulating a good trading strategy. To truly be successful, we also need to look at the news because it is the fundamental force that creates market movement.
Trading based on the news is a perfectly viable way of trading. But there actually two ways of forex trading using the news – a directional bias and a non-directional bias.
Directional bias means that you are think the market will only move in one direction when influencing news is released. This is hinged on the belief that specific news will only push the market to move in a certain direction.
But first, we should talk about what consensus and actual news. The news that will affect the market is always anticipated, day or even weeks before it is released analysts will already release their forecast – whether the numbers will have a positive or negative sentiment. Forecasts are not universal or uniform, different analysts will have different interpretations of things but you can expect that there will be one number that most of them will agree on – this is called a consensus.
When the news is finally released and the figures are given, then this is the actual number.
There is a popular advice among forex trading communities that hinge on trading the news – you should buy the rumor but you should sell on the news. This sentiment is borne out of the observation that whenever news reports are released it doesn’t usually match the movement that you would expect as a result of the data.
Here’s a scenario that illustrates this point: England’s inflation rate is expected to increase from its previous rate of 5 percent. The consensus is that inflation rate will be at 6 percent when it is released. This signals that the economy has weakened, which will also weaken the GBP.
Traders will not wait for the actual numbers to be released. Based on the consensus, they will already take a short position and begin selling GBP to other currencies to anticipate the release of the actual data.
Now, if the inflation rate data is released and it does confirm the consensus of 6 percent you would think that it is now time to sell the GBP. But when you look at the charts, the market is not moving as you have anticipated. The reason for this is that the big players have already reacted based on the consensus numbers and way before the actual numbers were released. At this point they may already be taking profits in the days running up to the announcement of the data.
Now, if the actual inflation rate that is released turned out to be 4.5 percent – much lower than the previous month’s inflation rate, what would happen is you’ll see a big rally for the GBP because the traders have not anticipated a rate that not only followed the consensus it was even positive. The traders are now quickly adjusting their positions in order to take advantage of the positive numbers and gain profit from it.
This same general movement will happen if the inflation rate turned out to be more than what the consensus predicted. The only difference being the GBP value will drop quickly because traders will try to offload more of their GBP as a response to a very weak UK economy.
A non-directional bias is a more common form of trading strategy. With this kind of method, a positive or negative sentiment is removed from the equation. The only expectation is that an important news report will cause a significant move in the market. The direction it moves in is not crucial, just to be there to take advantage of the movement is enough.
With non-directional bias, you have a plan in place to enter a trade, regardless of whether the price will go up or down. You are there to take advantage and make a profit.