Trading On News is primary Forex pairs travel understanding constituent, as well as that of profiting in the forex market.

Every morning, when preparing a session/day/week trading plan, a trader gets engaged in the impending session/day/week news analysis.

That said, profit trading proves requisite of 3 constituents:

1.  Knowledge of potential market strong movement time (not too difficult a job with news calendars being regularly released by almost all the brokers).

2.  Clear understanding ability of Trading On News and profiting mechanism.

3.  Relation between news and Forex technical analysis (pertaining to short-, medium- and long-term trends).

What do 99% of the globe’s traders prove losers?

Among other grounds, because classic literature offers no:

  clear-cut technique of Trading On News;

  explicit interfacing between news and technical analysis.

TECHNICAL SCHOLARS ON TRADING ON NEWS.

forex technical scholars (John Murphy, Jack Schwager, Bill Williams, Larry Williams, Cornelius Luka, Charles LeBau , David V. Lukas) are not known to ever have touched upon:

  the role of technical analysis in amid-news environment;

  news influence on the Forex and stocks technical analysis;

  Trading On News methods (instead, separating TA and FA, with the latter’s component being statistical data, contained in a news release).

That sort of technical scholars’ attitude towards the fundamental analysis has been elucidated by John J. Murphy in “technical analysis of futures markets”.

He wrote:

A number of experts, trading futures, use to qualify themselves, as either technical, or fundamental analysts. Reality is that the above boundary is under heavy erosion. Many of fundamental analysts possess, at least, primary chart analysis skills, whereas hardly a technical analyst is to be found, having general understanding of fundamentals.

The point is that the two analysis methods often turn contradictory to each other. Normally, the wake of critical moves is anteceded by the market behavior not meeting fundamental analysis concepts and being inexplicable by purely economic factors.

The above instances, being most critical, cause both TA and FA to be most contradictory to each other. Later on, they are sure to come into agreement, but the thing is too late for a trader to take adequate decisions.

The following may be treated as the explanation for the above seeming controversy: the market price takes the lead over all the fundamental data. Otherwise, the market price serves the fundamental data and the common sense leading indicator.

With the market having priced in all the known economic factors, prices start reacting to some new, yet unknown factors.

The most significant historic price growth and decline periods used to begin with nothing, or next to nothing pointing to changes from the fundamental data standpoint. But as soon as the above changes were realized by fundamental analysts, a new tendency proved to be under full-sweep development.

FUNDAMENTAL ANALYSIS: METHOD OF SEVERAL MICROECONOMIC FACTORS DYNAMIC ANALYSIS FOR LONG-TERM PROJECTING.

Essence of the method

A number of economists, being representatives of so-called fundamental analysis, make use of their techniques to:

  establish criteria for comparative analysis of two countries;

  compare at least SEVERAL microeconomic factors (released in news) of the above countries’ economies;

  to analyze the above microeconomic factors dynamics relative to the precedent statistic trend and to miscellaneous economic and political constituents.

All that sort of analysis is allegedly performed for the sake of LONG-TERM currency rates prognostication for the two countries’ under analysis.

Thus, for long-term prognostication adherents, an individual news is “a trifle” to be considered within its preceding statistic trend dynamics and in total with the country’s other economic indicators by way of comparing economic and political situation in the countries, whose currency rates are being projected by an analytic economist in compliance with criteria developed by him. 

The following 2 reading-book type examples may be availed of in reasoning how trader-friendly may be such LONG-TERM projections on the basis of a “complex” analysis (the books are being quoted senselessly by fundamental analysis followers without understanding of WHAT sorts of long-term projections are put forward by analytic economists).

Example 1 borrowed from “forex market fundamental analysis” article.

Quoted:

In accordance with experts’ estimations, by June 1994 the purchasing power parity (PPP) of the USD versus the DM amounted to:

  1.68 by consumer prices;

  1.82 by producer prices;

  2.05 by services prices.

-----------------------------------------------

 1.82 on average

The author of the article himself acknowledged the imperfection of the above PPP analysis method. He wrote:

By June, 1994 the USD to the DM rate was actually much lower than the PPP. In the long-term aspect (several years) a real currency rate proves prone to fluctuating around the PPP. However, the PPP itself is under constant recalculation, as price levels change in the countries under comparison (e.g. in 1990, the PPP-related USD-DM rate amounted to 2.13).

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You are welcome to make Your own assessment of that sort of a long-term projection – see the above figure (The EURUSD, W1, June, 1994, to be noted that before January, 1, 2002 trading stations display the EURUSD to be the DM rate).

Comment by Masterforex-V:

1.  The above “forex market fundamental analysis” article, being referred to by the majority of analysts, ahs been written AFTER 1995 (and it contains the 1995 statistics). Thus the 1994 USD-DM growth was “wisely” projected AFTER the event.

2.  The author of the article was not surprised by the fact that the LONG-TERM perspective (1990 through 1995) PPP calculation has no authority over the currency rate (the DM rate has grown in “long-term perspective” within 5 years by 1990 bps from 1.1625 as of 01.01.1990 to 1.4535 as of 01.01.1995, whereas its PPP ratio has declined from 2.13 to 1.82 within the above 4 years). 

3.  After reaching its high in March, 1995, the DM has made sharp downside reversal, despite the economic analysts’ LONG-TERM different countries’ PPP estimation.

Example 2: Inversed LONG-TERM EURUSD decline projection completed in late 1999:

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The EUR, common European currency, chart (with the ECU being depicted before 01.01.1999)

 “The common European currency introduction is, undoubtedly, the greatest experiment in the human history. No previous attempt to establish a financial alliance has been a success. The euro is also presently treated by many as the experiment, not necessarily doomed to success. During the whole of 6 months of 1999 the euro has been under steady decline, with someone attributing it to the new currency distrust and with others feeling the ECB efficient monetary policy (a low exchange rate benefits European exporters by way of raising of their commodities competitive power at the world markets)”.

Below is the EURUSD (DM-USD) chart starting from October, 1999:

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I will abstain from any comments regarding economic analysts’ LONG-TERM projections usefulness for a trader. Everyone is free to jump at independent conclusions.

FUNDAMENTAL ANALYSIS - METHOD OF EACH INDIVIDUAL MICROECONOMIC FACTOR DYNAMIC ANALYSIS BY ITS PRIORITY

Richard E. Yamarone “Key economic indicators: trader’s manual”,

A.S. Kiyanitsa “Fundamental analysis of financial markets”,

Essence of the technique. The above fundamental books contain characteristics of each economic indicator, viz.: what it means for the given country economics and what’s the way it “must” affect its currency rate.

For instance, to establish the influence of 2 inflation-linked indicators (CPI and PPI):

1.  Kiyanitsa explains their influence through:

  forms of inflation (moderate or creeping inflation, galloping inflation, open inflation, suppressed inflation, balanced inflation, etc.);

  types of inflation (inflation of demand, inflation of costs);

  variety of inflation measurement techniques through CPI with and ex food and energy;

  influence of indices on the USD rate: the PPI/CPI growth = the USD growth;

2.  Kiyanitsa supplies the data source to ensure the published data correction.

3.  Kiyanitsa issues monthly statistics of the above data from 1993 to 2003.

The above procedures accomplished by him for each economic indicator makes up a concise course for perspective Dealers’ economists and analysts and contains heaps of economic information along with trader-oriented conclusions that:

  the PPI/CPI growth – the USD growth;

  more than 0.2% PPI/CPI deviation from the expected values may appear sufficient to trigger an appreciable reaction of the forex market (growth/decline affects the US percent rate change possibility).

 And how does it look in reality?

17.01.2007

16:30, USA : Core PPI ex food and energy, December +1.3% +0.2% +0.2%

16:30, USA : PPI, December +2.0% +0.6% +0.9%

Result: the USD has dropped.

Legend: see above.

16.02.2007

16:30, USA : Core PPI ex food and energy, January +0.2% +0.2% +0.2%

16:30, USA : PPI, January +0.9% -0.6% -0.6%

Result: the USD has dropped amid news, but lifted the next day.

Legend: see above.

15.03.2007

15:30, USA : Core PPI ex food and energy, February +0.2% +0.2% +0.4%

15:30, USA : PPI, February -0.9% +0.4% +1.3%

Result: the USD has dropped.

Legend: see above.

13.04.2007

16:30, USA : PPI, March +1.3% +0.7% +1.0%

Result: the USD has dropped.

Legend: see above.

Masterforex-V comments:

It’s not difficult to notice that the simplified “PPI/CPI growth = the USD growth” scheme is too far from reality.

INFLUENCE OF FOREX PROJECTIONS ON FOREX RATES. FOREX REACTION ON NEWS RELEASED. “BUY RUMOURS, SELL FACTS”.

The technique essence:

A.  Buy rumors: rates movement favors the coming news (with data expected being better than the estimate the rate grows; with that being worse, the rate drops).

B.  Sell facts:

  rate grows further, if the news released are better than the estimate;

  rate drops, if the news released are worse than the estimate and the previous data.

The rumor-linked trading technique is to be found in A.S. Kiyanitsa’s “Fundamental analysis of financial markets”, St-Petersburg ,: Peter, 2005, 288 pages.

Market reaction to fundamental indicators released

No

Microeconomic indicator estimate-to-actual comparison

Influence on national currency rate

Notes

1

The actual value is better than the estimate

National currency rate growth .

2

The actual value coincides with the estimate

No rection to the news. The market has accepted the value.

3

The actual value is worse than the estimate

National currency rate decline

4

The estimate has been worse than the previous, but the actual data appeared better

National currency rate growth with the market reaction being stronger than in para 1. The news will be treated as unexpected .

5

The estimate has been better than the previous, but the actual data appeared worse

National currency rate decline with the market reaction being stronger than in para 3. The news will be treated as unexpected.

Eric Naiman in his “Trader’s minor encyclopedia” gives detailed explanation of this technique.

Three alternatives may be picked out as regards the market reaction to a fundamental occurrence.

Alternative 1 takes place in case the market expectations are met by and large. Hence, the price dynamics will not undergo any significant changes.

Under Alternative 2 the market expectations are not met by virtue of the occurrence itself, i.e. the above factor being underestimated by the market. In this instance, the price dynamics will continue, but it will accelerate at the moment the data is released.

Under Alternative 3 not only the market expectations fail to be met, but they prove entirely erroneous. Then, strong trend inversion is to be anticipated. Pre-inversion market meditation period is also to be expected. Market-makers, having effected market-expectation entries, may hold the rate from sharp changes in order to have time not only for loosing positions squaring but as well opposite entries.

“Buy rumors, sell fact”… The history keeps mum of why and who was the first to introduce this statement. Nevertheless, it proves applicable to all the financial markets’ practice.

Trader’s standard reaction to a rumor consists in being the first to effect an entry. There’s no time to think, with the rate of response being a priority.

The moment, the rumor appears at the market, sees conception of a new powerful and swift wave, being capable of forming any sorts of strongest trends.

The discount rate change is the most wide-spread rumor at the stock and forex markets. The percent rate hike market expectation is responsible for the stock market decline and for the national currency growth.

And till the above rumor reaches the last trader’s ears, the existing trend will continue. The trend power will be directly proportional to the number of the rumors new recipients.

The second portion of the statement is backed by the traders being interested in amid-rumor jobbing exactly till the moment the rumor is either confirmed or denied. This, as a rule, results in reverse price movement. At this moment it is most important to be the first to “jump off the train”. As soon, as one trend terminates, another one begins.

At times, trend termination gives rise to a flat. But, anyway, only slow-witted traders continue jobbing under the old trend after the rumor is materialized.

False rumors blind following may bring about significant losses. In case of any early indications of the market’s unwillingness to trust the emerged rumors, stop trading them! Watch out when trading rumors generally!

Now we will analyze several examples of rumors emergence at the market.

The drawing is taken from Eric Naiman’s book.

Eric Nayman claimed further:

It is not known how the market might have reacted to the percent rate hike in the UK . But most probably, the GBP fading would have occurred, though it would have been not so strong, as it used to actually.

The example below will help us watch the situation, where the percent rates were hiked by the market expectation value.

The dollar has gone through several stages of the market reaction to the potential rate hiking in the USA, whose intensification involved the USD growth versus the DM and whose weakening involved the latter’s easing back and stabilizing.

The higher the USD grew, the less were the traders, not trusting the above rumor and abstaining from longing on the USD. A month ahead of FOMC meeting the USD started recessing, which fact is attributable to unwillingness to stand long on the USD on the basis of the “old” rumor.

The drawing is taken from Eric Nayman’s book.

Masterforex-V comments:

Please, turn Your focus to the facts, not touched upon by Eric Nayman , but being vivid in the drawing from his book. Having knocked off the stops of those having entered long amid news, the USD continued its bullish trend versus the DM.

WHY THE “BUY RUMORS, SELL FACTS” TECHNIQUE IS INEFFECTIVE.

Multitude of examples may be drawn, where the “Buy rumors, sell facts” technique is 50/50 effective. I will resort to 2 examples only, linked to the percent rate hiking in the USA .

Example 1. The US percent rate has been hiked at the 29.06.2006 FOMC meeting. Instead of growth, the dollar faced sharp decline, being D1 trend reversal.

Now, attention to:

1.  the fact that the preceding stagnant movement linked to the percent rate hiking in the UK (the EUR especially) may hardly be attributed to the “buy rumors” principle

2.  the fact, that none of analytic economists has envisaged that sort of the long-term trend reversal AHEAD OF news

3.  AFTER the news came, ALL the analytic economists have found a logic and natural explanation to the above reversal.

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An important detail is to be added. As different from Eric Nayman’s example, the USD decline has not stopped in several days, but it progressed through more than a year.

You are welcome to navigate the above examples to try to find difference in the rates behavior. In so doing You will independently discover one of the MFV trading system regularities of rates behavior amid news.

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Example 2. 0.25% rate hike in the UK dated 10.05.2007. The rate has been hiked. The GBP lifted from 1.9848 to 1.9908 and dropped sharply. Turn Your attention to the GBP decline during that and the previous days. The “buy rumors” rule may hardly be consistent with this example.

In the long run, the rumor of the BOE percent rate hike and the fact thereof resulted in the GBP several-hundred-point drop.

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Thus, let’s correlate the above examples with Kiyanitsa’s and Eric Nayman’s theses: “… when the market expectation are met on the whole. Then price dynamics will not undergo strong changes”. The above is too far from forex trading reality.

NATURE OF THE “BUY RUMORS, SELL FACTS” TECHNIQUE ERRORS. ANALYSIS BY VIRTUE OF THE MFVA TRADING SYSTEM.

The “Buy rumors, sell facts” technique is but 50% correct. What else is to be expected from a technique,

  that is known to ALL the world traders in a “secret” fashion from analysts’ mouths;

  that is persistently suggested at Dealers’ forex schools, thus subconsciously making beginners trade by virtue thereof;

Thus, there appears a natural dilemma:

1.  Either the “Buy rumors, sell facts” technique is correct - then there is a question of WHAT’S THE WAY 99% of traders are going to loose their deposits by virtue thereof.

2.  Or it is PARTIALLY correct – then it is understandable why there are so many examples of:

  confirmation of the “Buy rumors, sell facts” technique correctness (in forex analysts’ books and articles);

  the “Buy rumors, sell facts” thesis fallibility, with news data being worked off by several tens of bps, but followed by a reversal and hundreds and thousands bps opposite travel, involving stops knock off (see the figure above).

In all and all, the paramount importance is acquired by the issue of understanding of WHEN and HOW the “Buy rumors, sell facts” technique does function at the forex market and WHEN it doesn’t.

The above regularities are found with:

1.  neither forex technical scholars (their “everything is priced in” principle automatically expels news, as price formation background, from their interest subject and their field of analysis),

2.  nor forex fundamental scholars :

  for long-term prognostication adherents, an individual news is “a trifle” to be considered within its preceding statistic trend dynamics and in total with the country’s other economic indicators by way of comparing economic and political situation in various countries;

  for adherents of the principle of rates growth amid better-than-expected news it is explicit contradiction to the forex trading reality;

  for the “Buy rumors, sell facts” technique adherents, it is so a wide diversity of movement alternatives, that any sort of movement may subsequently be grounded as “regular and logic”.

SO, WHAT IS A TRADER TO DO IN THE ABOVE SITUATION? 

See the next chapter on ‘Trader’s code of good practice by news under the Masterforex-V trading system”.

To be continued . 

You can discuss the chapter with the Academy members by following the link

Chapter 1. Trend definition in the Masterforex-V Trading System >>
Chapter 2. Levels of resistance and support in Masterforex-V Trading System >>
Chapter 3. Actual and false breakout of the resistance and support level. Rebound from technical level.>>
Chapter 4. Technical levels of Forex by Dow Jones agency. >>
Chapter 5. Pivot point of currency pairs >>
Chapter 6. Slanted Channels, as a tool of the Forex market analysis >>
Chapter 7. Opening of positions when using Slanted Channels >>
Chapter 8. Slanted channels in the Masterforex-V trading system >>
Chapter 9. Classic figures of technical analysis - Trend Reversal  >>
Chapter 10. Classic figures of technical analysis - Trend Reversal (ending) >>
Chapter 11. Technical analysis - patterns of continuation of trend - rectangle >>
Chapter 12. Patterns of continuation of trend - Gaps >>
Chapter 13. Patterns of continuation of trend - flag, pennant and wedge >>
Chapter 14. Models of the Forex technical analysis - triangles >>
Chapter 15. Symmetrical triangle - regularities and traps >>
Chapter 16. Ascendant and descending triangles - secrets of the strong signals for opening the positions >>
Chapter 17. Expanding triangle - unresolved problems of classics of the Forex technical analysis >>

Read more:

Chapter 19. Trader's code of good practice by news under the Masterforex-V trading system >>
Chapter 20. Ally pairs: which gauge at forex is the most unbiased (impartial) and precise. >>

Part II. Algorithm Of Trading Technical Analysis >>

Book 1. The secrets of trading art from a professional trader (or what Bill Williams, E. Naiman and others did not tell traders about Forex) >>

Book 3. Points of opening and closing of positions at the Forex market (basic course) >>

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