Pre-Trade Considerations

Before placing a trade you should have a very good reason for putting your money to work in that particular trade. In this Wiki, we will explore concepts that you should have already considered prior to getting into a trade. We will take a look at understanding economic indicators and the market expectations of those indicators, framing a strategy in the context of the current market sentiment, and basic strategy rules that you should have prior to getting into a trade

This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.

Pre-Trade Considerations

When incorporating economic indicators into your trading routine there are 4 major things that you must consider:

1. The key number from the economic indicator announcement itself. This is frequently referred to as the headline number.
2. Analysis of the indicator or understanding what the indicator means.
3. The overall consensus forecast by professional analysts before the announcement. This could be you once you get good at Fundamental and Sentiment Analysis.
4. The live-streaming news feed that accompanies the release. If you are just starting out there are a few that are free but slightly delayed news feeds to choose from.

You will hear the indicator announced via the news feed by an audio squawk first which will then be followed by a text headline with some extra analysis provided by a professional analyst. There are a few really good premium paid audio squawk services that we looked at in the Trading Tools Wiki that can really add an extra layer of profitability to your trading. For now, we just want you to know that there are some really good resources that do most of the heavy lifting for you so you don't need to feel overwhelmed about where you are going to get all this information that we are discussing. There are also some decent free resources that you can use to start out with until you can justify the extra costs for a premium service. Just think of this as investing in your growth and your trading business.

One of the most important factors of any economic indicator is the expectation or the consensus for the actual figure. What this means is what expert analysts and economists think the indicator will show for the given period we are looking at. For example, will the figure come out better than the previous month or worse, and if so, how much better or worse? Traders can then use this number to base their expectations.

We want to know what these expert analysts and economists think the number is going to be because it's literally their job to go through all the literature, analyze the Bureau of Statistics and government agencies, and spend their lives tracking and following this data. We don’t know about you but we are certainly not going to do all that work and neither is the rest of the market. That's why these analysts exist; to feed us quality and well thought out expectations so that we can get a good idea of what is likely to happen with the data.

These consensus numbers are generally gathered by the main news companies such as Reuters, Bloomberg, MNI, etc. These are the companies that actually employ some of these analysts and economists. The consensuses are designed to get an average view across a wide range of different experts. The idea behind this is so that the data is more balanced and hopefully more accurate.

Along with these numbers the analysts also provide consensus for a high and low figure. These high and low figures give traders a range in which to set their expectations. Traders can then use this information to potentially position themselves ahead of the event.

Expectations

Think about this for a minute, professional traders do not generally trade the news as it’s released but rather they get in based on what they think in the days leading up to the release. They are attempting to price in the expectations from the upcoming news. They do this by using the expert analysts expectations. This is what we call trading into a risk event and we will go into great detail about this concept in a later Wiki. For now, just understand that this something the institutional players really like to do.

Number behind the Number

Another factor to remember is that the markets will very often pay attention to the numbers behind the headline number. This explains times when you might get a really good headline figure, the currency pair rallies, but then the price seems to go the wrong way based on the positive headline. This can be frustrating but there can sometimes be negative things inside the figure which means that despite the seemingly positive headline things are not actually as good as it seems.

This concept can apply to almost any type of figure. To illustrate it we will use the example of employment data.

If the employment numbers beat expectations by a wide margin showing that more people have jobs than the economists expected, you might think this is a very positive thing and should benefit the currency. However, if you look deeper into the numbers and you find that the number is all made up of part-time work and average wages have dropped dramatically then this is actually bad news because the overall standard of living for the people of the country will fall. Having more employed people is positive but having 1 person gain a new full-time position is worth at least 5 new part-time positions in economic value so the markets will obviously want to see the majority of jobs created be full-time jobs.

This makes the headline alone not enough to tell us if the news was good or bad for the currency or the economy as a whole. This is a classic situation where we get a good headline but the finer details show that the price will go in the opposite direction. As a trader, you need to be aware of this so that you can quickly research all of the analysis before deciding how you will trade a particular event. But don’t worry, the news feeds will alert you to the figures behind the headline almost immediately after the initial release.

Tier One Vs. Tier Two Data

Tier one data points are, for obvious reasons, more important than tier two data points. This means that the market will generally react far more to tier one data. However, in certain circumstances, this may not always be the case.

For example, if the entire market is really concerned about oil prices and the impact that falling oil prices will have on inflation or a particular economy then this suddenly makes oil inventories much more important at that moment. This can be true even though oil inventories are typically considered to be a tier two data point. If the oil inventories show an oversupply of oil then this means potential further declines in the price of oil possibly leading to lower inflation and possibly the central bank cutting its interest rate. This sometimes happens for countries that are heavily dependent on exporting oil such as Canada. However, if the price of oil is stable then the Canadian currency will likely ignore oil as a leading pricing indicator for the Canadian currency.

As you can see, a lot of analysis is formed from the starting point of what the market is focused on most of the time. This is crucial to have in mind if you are to become successful as a Forex trader over the long run.

From here we will start with the indicators that are typically considered to be the most important. Most of these are applicable to most currencies but a few of these indicators are specific to the US economy. These are particularly important even to non-US dollar traders because of how much focus the Federal Reserve places on them and, in turn, how much the overall market reacts to them. Remember, the US Dollar is involved in roughly 70% of all currency transactions on a daily basis so US economic indicators are going to be very important to all market participants.

One thing to keep in mind is that you don’t have to memorize every little nuance of each indicator. Doing this can get a bit overwhelming. What we would suggest is just understanding the basics of each indicator and the fact that it is important. Then as you are watching these indicators in your trading you can literally look at any economic calendar and get a great description and details of what that specific indicator measures. By the end of this Essential Forex Trading Guide you will have all the tools to make your job of analyzing economic data simple.

Rules for All Strategies

Strategy Overview

The overall trading strategy that we recommend is based on 80% fundamentals and sentiment driven news flows with a mix of 20% technical analysis. It’s largely based on how the central bank’s current mandate is playing out against the actual economic situation of their country.

The details of how the overall strategy works are in understanding the information in the Wikis on Fundamental and Sentiment Trading Strategies. This information helps to develop a bias for specific currencies over the long run and to stay in tune with the markets to understand how current sentiment and news flows will affect any new trades you take.

The average holding time will depend on the speed of the market. Average take profits and stop losses will be based on the average range of the currency pair being traded and the strength of the current sentiment.

Basic Strategy Rules

• Buy fundamentally strong currencies against fundamentally weak currencies.
• Sell/Short fundamentally weak currencies against fundamentally strong currencies.
• Only trade against the big picture fundamentals if the current market sentiment is strong and likely to last for more than the current trading session.

Trading Strategies

Before getting into any position your main thought process should be twofold:

1. What is causing this current move?
2. How does this move fit in with the overall fundamentals, is it with or against the fundamentals?

A rule to bear in mind is that markets are very short term in nature. This is because the market is made up of people and people are very fickle in nature. They are constantly trying to deal with the ever changing economics of countries to try and position themselves to make some pips.

Keep fundamental analysis simple. Overcomplicating or adding too much information to the analysis will only lead to frustration and potential losses. This is because the market only focuses on one or two pieces of information that the central banks themselves have stated they are currently focussing on. Focus on the here and now, not what the housing sector could potentially do five years in the future as this won’t help you make a profit today.

The actual individual trading strategies are found in the Fundamental and Sentiment Trading Strategies Wiki. Here we are just giving an overview to get your mind primed for more layers to this fundamental and sentiment trading methodology.

Related Wikis

Readers of Pre-Trade Considerations also viewed:

• Fundamental and Sentiment Trading Strategies
• Technical Trading Strategies
• Speculating
• Having an Edge in your Trading
• Essential Forex Trading Guide