So how can you benefit from this type of trading? Well, here are some basic rules for you to follow:
- Always look ahead a few days and be aware of any upcoming major news releases such as interest rate announcements, CPI, GDP, Central Banker speeches, etc…
- Pay attention to recent news announcements and watch market reaction. If a seemly negative news release is unable to move the market by much (or vice versa), then there must be a reason why.
- Always keep in mind of the relationships between different news releases. Retail Sales to GDP, PPI to CPI, etc… If we get a much better than expected Retail Sales figure this week, market will tend to expect a better than expected GDP next week, therefore take advantage of this sentiment.
- Watch the market closely the day before the major announcement. Preferably at the end of Tokyo session or earlier for European news releases, or at the end of London session for U.S./Canada news releases.
- Place a trade in the direction of the market if you see a short term trend establishes, and make sure to close the trade before the actual news release. Market Sentiment has absolutely no effect on the actual result. If you can make anywhere from 40 pips to 100 pips per sentiment trade, it is good enough. There is no need to make the extra points from the news release. You can trade the retracement of the news release and take your profits.
- Read market analysis by different economists. Read my weekly outlook and learn how to read the market.
- Not every major news release is sentiment tradable. If the market is confused, then sit it out. Only trade the market when you see a clear, established short term trade.
Once again, market will try to price in a high impact news release few sessions before the actual release. This price in market action is called short term Market Sentiment. For instance, if there is an overwhelming consensus that a certain central bank is going to cut rate, we should be looking at its currency at least a day before and try to “price in” our trade, just like most major players by selling it ahead of time.
Retail traders don’t see this simple fact. People just follow the market without asking why. As a herd, traders are not very perceptive. However, as individual traders, if we just keep an eye on future events, it is not hard to predict what the market is going to do one week ahead of time.
We have to understand that the market does not move based on Technical Analysis or just some moving averages crossing. If this is what Forex is all about, then we should have 95% of winners in the Forex Market. But I think the opposite is true. Most traders would rather choose the complicated method, although they don’t understand it, rather than choose an easy, simple method because they think that trading couldn’t be this easy… It is the same idea as if you raise the price on a certain item will add more perceived value to it, even though it is the same item.