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Fundamental and Sentiment Trading Strategies

How to Trade Risk Events

Day trading is a very good way to find consistent trades that have high probability and that require smaller stops. However, the down side is that you have to be at your trading desk all day to find them. This can get very tiring very quickly.

There are other day trading strategies that you can use to find better opportunities days and sometimes weeks in advance. This is the concept of trading risk events.

A risk event is basically any economic release or announcement that is scheduled on the economic calendar that has the potential to be a high impact event. Not all risk events are created equal and some do not move the market even 1 pip while others have the entire trading world in anticipation for days on end leading up to them.

This strategy relies on knowing which risk events to trade which will come through experience but you can shortcut this by following along with the daily analysis that some of the more premium news feeds offer. In that analysis, one of the biggest points is to highlight the tradeable risk events that you should be focussing on. You will also notice that a huge part of the news feed revolves around planning these risk events each day.

What is the process for trading risk events?

There are two main ways to trade a risk event:

1. Trading into a Risk Event

We trade into risk events because this is generally how the markets trade them. Many people imagine risk events to be chaos and visualize trading floors in utter panic with everyone running around trying to react to the number as it's released with huge amounts of money being made or lost. On some trading floors, this does happen but only on huge and particular events such as the hotly anticipated NFP figure or a surprise interest rate move by a central bank. Generally, risk events are traded in a much more serene manner with careful planning and pinpoint accuracy regarding entries and exits.

Let’s understand exactly how this works by looking at some examples of how these risk events play out.

First of all, traders will look at the economic calendar and the expected forecasts for the following week on Friday afternoon. This allows them to see what risk events are planned and most importantly how the economists and experts anticipate the results of the releases. Some show a better reading than the previous release, others show a worse reading, and some forecast no change at all. Traders will then use that information to tie it in with the bigger picture.

For example, if we have UK average earnings next Wednesday and it is expected to be much better than the prior reading, and we also know that the BOE have made average earnings one of their key focuses in deciding whether or not to hike their interest rates, it is likely that the market will start buying the pound into that risk event because it’s expected positive and this makes it more likely that the BOE will hike their rate sooner.

The big picture is very important when deciding to trade into a risk event and the general rule is that we need to have market expectations match the overall picture for that currency. For example, if the event is expected to come out better than the previous and the currency is bullish in the long term then this is a decent reason to trade into a risk event. If the event is expected to be negative or worse than the previous and the currency is bullish in the long run then there is no real reason to trade into the event and should be left alone.

Once you have the expectation and you know the big picture fundamentals your next step is to try and find as many analyst reports as possible. Analysts are experts at putting all of the information together, creating different scenarios, and trying to figure out the likelihood of something happening or not. They will write interesting articles on what to expect from the upcoming risk event and why they feel a particular outcome is likely. This gives you a final round up of how the market is viewing the event overall.

Once we have a risk event that we are confident to trade the next step is actually entering the market. As with day trading the news feed the important thing is not so much where you get in but rather that you are in at some point before the day of the risk event itself. If you are correct in your analysis the markets will start moving in the expected direction in the run up to the event and you can actually book your profits before the event is even released.

As a general rule, the closer to the release you enter the market the fewer pips you should look to make. The goal of trading into risk events is that you should take your profits before the event is actually released so that you save yourself any of the risk associated with holding through a volatile news release.

Of course, if you want to hold on to your trade for extra pips that is fine too. However, if you are only getting in on the morning of the release then you may consider holding through the event because you will not likely have many pips on the table. If you do that then you should always have a day trading size stop in place and if the price is closer to your target than it is to your entry you should make sure that you do not lose pips on that trade. If the risk event comes out as expected then you will likely get a reaction in your trade direction but if it comes out opposite as to what you and the markets were expecting then the price will quickly reverse the entire move that led up to the risk event.

The quickest way to get good at trading risk events is, of course, to practice trading them in real-time.

Let’s do a recap on how to trade into a risk event.

First, you need the forecasts and expectations for something that matches the overall fundamental view for that currency either positive or negative.
Next you research and check what other analysts are saying to give you extra views and preparation.
Finally, you need to get into the position as early as possible at the best possible price. Technicals could help with this but you could also use the position splitting technique if you are unsure about getting in at market or waiting for a pullback. If the trade plays out look to exit sometime before the event so that you are not exposed to anymore risk.

2. Trading out of a Risk Event

Sometimes there will be no clear expectations for a risk event that we can trade into despite the fact that the event is viewed as important and potentially a high impact event. In this scenario, we keep a close eye on the event and try to trade out of it instead. This is generally viewed as safer because we know very quickly whether we were right or wrong with our expectations. If we didn’t have any expectations that waiting for the risk event to be released will tell us how to trade it based on the deviation.

How can we trade out of a risk event?

The process of trading out of a risk event is very simple. First, we highlight the events that could potentially impact the markets then we do the same kind of research and determine how anticipated they are by the markets and the analysts. Next, we identify what is a possible deviation from the expected figure that could potentially impact the price significantly.

For example, if an unemployment figure is expected to show a reading of 5.8% then a reading over 6.0% would be considered much worse and worth trading. Conversely, if a reading of 5.5% came out this would be considered good and worth trading in the opposite direction.

This does not mean that you want to be trading every risk event whenever there is a deviation. Rather, it’s best to line up deviations with the overall fundamental picture. For example, we want to be waiting for an event just in case there is a positive deviation because this lines up with the overall positive fundamentals that are driving the currency right now. The opposite is true for currencies with a negative view on them; we would be looking for negative deviations on high impact events.

While you are learning it will pay dividends to really make sure that you are getting as much analysis from the premium news feeds that you can because they will walk through the plan of each risk event each day. The news feed will contain detailed plans and research for every major event that you can use to help with your trading. This makes it very important to get a trial of some of the various news feeds and consider factoring in the cost of this to your business plan.

The general rule for trading out of risk events is taking advantage of unexpected deviations from what the market is expecting. Of course, you cannot plan these because they are unexpected but it is certainly worth being at your desk when the releases come out so that you are ready to take advantage when this type of event does occur.

Now that we have a collection of short term strategies the next thing to do is to start zooming out a little bit and look at ways to trade the markets without being tied to your desk if that is the path that you wish to go. It’s worth having a good understanding of how to trade in this way for when you potentially manage much larger funds that requires more careful trade management.

How to Trade Upcoming Risk Events

After you have your assessment of the fundamentals look for an economic event that is expected to have a better than the previous number to be released. If the fundamentals are not looking so great then you would be looking for the economic event to come out worse than the previous.

As long as the number is expected to come out in line with the fundamentals traders can place a trade before the figure comes out in line with the fundamental outlook. If we are looking at a positive fundamental situation and the economic number comes out in line or better than expected the pair will likely rally in the direction of the fundamentals. However, it the number misses expectations we will probably see a decline against the big picture.

The point is that the big players in the market are placing their trades in accordance with the long term fundamental outlook. One figure that is counter to this outlook will not change anything in a series of many figures in line with the fundamentals. All this deviation will do is simply provide a better place for the professional traders to get back into the market at a better price. In this case, we should expect the market to continue back in line with the fundamentals shortly after the figure was released if the figure was not in line with the fundamentals.

In essence, you potentially profit by getting in before the event even if the event does not come out as expected. In this case, you will have to sit through some drawdown but the idea is that if the fundamentals remain intact then this drawdown will be temporary and price will eventually come back. This also gives you an opportunity to add to the trade when it has pulled back against you. However, you should not already have a full risk amount on if you are planning on adding to your position if the price goes against you.

The goal is to get in at the best possible price so adding intelligently to a position at a better price isn’t a bad idea. Of course, solid money management should be used and this type of trade should only be employed by traders that have plenty of experience in the markets.

How to Trade with Central Banks

The traders in the Forex market are all trading around the Central Banks of individual countries. The market will react every time a central bank takes action by implementing a policy or mandate or even say something in or out of tune from their normal rhetoric. It could be as simple as a member speaking more hawkish or dovish than normal.

If a central bank has recently changed its tone, just the mere mention of something such as inflation, could completely change the overall trend of that currency.

The primary role of the central bank is to control the money supply for the country in which it sits and maintain economic order. To do this the central bank will have targets which usually revolve around inflation and growth, both of which are usually around 2%.

Central Banks will typically offer forward guidance to the markets for 2 reasons:

To prevent unnecessary market crashes or panics about what the bank might do, which is caused by speculation in the market.
To ensure that their actions and policies have a desired effect. For example, if they are deliberately trying to weaken their currency then they will make it explicitly clear to the market and outline how they intend to do this, followed by expressing their determination to do this no matter what happens.

The key rule of central bank tools is that everything revolves around interest rates. A large part of the time all the markets are ever thinking is “how will these new information impact interest rates?” The answer to that question is what drives prices up or down.

Process for monitoring central banks:

Follow the news feeds and look out for articles written right after any major central bank statements that give an insight into how the markets are reacting to this information, and how you should best trade it.
Central banks release all of their policy actions and plans via specially planned statements. You can find when these statements will be released on the economic calendar weeks in advance, so you will need to be noting the dates and then monitoring all related news articles to get an idea of what traders are expecting and how analysts expect these events to move the currencies.
Place your trades in line with expectations and existing market reactions. Do not become scared out of your positions by short term volatility. Closely monitor the fundamental situation and make sure that your expectations and previous reasons for entering any positions are still valid on a session by session basis.

How to Trade Central Bank Statements

Trading central bank statements can produce large price moves in the market and be extremely profitable if you know how to catch the move.

There are 2 main ways to trade a central bank statement:

1. Analyse the market expectations and position yourself before the event:

By entering before the statement you have a much higher profit potential but the risk is higher if it does not play out as expected. The key is to have a very firm expectation regarding the upcoming statement. If there is a firm reason to think that the central bank will announce some type of action with regard to its monetary policy or if they change their tone of language then this will almost certainly move the market if it happens.

2. Wait for the bank to confirm the market's expectations and then trade the aftermath

This is where you look to trade the pullback after the news rather than getting in before the event. The key to this strategy is to be patient and wait for price to pullback to an attractive level.

How to Trade Upcoming Economic Figures

Trading the calendar can be very profitable and the key is utilising and understanding the information and the expectations available well ahead of the figure or event being released.

When deciding whether or not to trade an economic figure trader’s need a deep understanding of the ongoing fundamentals, the current sentiment, and what the market is expecting from the figure.

For example, if the fundamentals are extremely bullish for the currency and the figure is expected to come out worse than the previous one, this would generally be a trade to avoid, because there is a contradiction between the fundamentals and the news event.

What we want to see is the figure to have expectations that are in line with the fundamentals. We want the figure to be better than the previous one if the fundamentals are bullish. In this situation there is a good chance it will happen and the market will look for excuses to keep buying the currency in line with the buying that has already taken place.

If the figure doesn’t meet expectations it will likely pull back. The fundamentals will still remain intact because one bad figure in a long standing series of positive figures doesn’t change the long term outlook for that currency. The counter trend move will most likely be temporary and the price will soon recover, likely sending the trade into profit anyway. This is the kind of situation that gives us a nice pullback to get in on and make some pips. This will be the case unless the deviation was so large that we have no choice but to revaluate the fundamentals. This works in the same fashion for weak currencies. We would simply look to sell or go short instead.

Positioning yourself directly ahead of these events is more risky, but as long as you only trade in line with the fundamentals, drawdowns will likely be temporary. Waiting for the figure to pullback is another way to get in this trade but can be trickier and requires a higher level of skill and patience. Sometimes the price doesn’t come back if the figure is big enough.

How to Trade the Previous Session

There are 3 main sessions that we have already learned about in previous sections:

The Asian.
The London.
The New York session.

This cycle repeats for the entire 5 day trading week making it a 24 hour market.

What you are looking for is what has happened in the previous session that has moved the markets. Sometimes nothing happens but often times a country has released an economic figure affected the currency that it belongs to in the previous session.

What often happens is that traders from the new session will trade the continuation of the move from the previous session.

One strategy is to enter in the direction of the move from the previous session slightly before the next session is in full swing. In this way the trader can catch any potential move before or as it starts to continue.

This strategy is simple and mainly a sentiment based strategy where traders look for anything that has moved the price of a particular currency in the previous trading session to continue moving it into the current and following sessions.

The trade begins with a thorough assessment of what has happened in the previous session, which news has been released, how it impacted the market, and which currencies were affected. Traders then determine whether or not to anticipate this move to continuing in the new session based on what has already taken place.

For example, if some key Australian data was released during the Asian session but the AUD currency was unaffected then it’s very unlikely that traders will look to get in on a trade with the Australian dollar in the following session. On the other hand, if the event came out and showed a large deviation and the price of the AUD moved heavily, then we can expect traders in the next session to get in on the move too.

This strategy relies on having a real time news feed that updates the market sentiment instantly. With both entry methods it is important to keep your eye on the news feeds for any events that could change the sentiment and send price moving heavily in the opposite direction.

There are 2 ways to trade this type of event:

Trade the Breakout: This can be done with a market profile trade because it may be that price is close to the highs or lows. This allows you to enter the move should it simply continue into the next session with little or no pullback.
Trade the Pullback: Often times the market will take a break between sessions and the price will pull back against the move as profit taking happens. This can provide some great trading opportunities from levels of support and resistance, but patience is required to wait for the correct pullbacks.

Trading Surprise Data and News

Another strategy that you can use is one that has a high probability of success and is also extremely simple. The caveat is that it can only be used when there is an extreme deviation or surprise that the markets absolutely did not see coming.

The easiest way to see whether or not this has occurred is to research each risk event and find out what the market is expecting so that if the opposite happens you know that it will cause a large sustained reaction. The key word here is sustained because lots of minor deviations cause reactions but these are typically quickly retraced and within a few hours things are all back to normal and it’s as if nothing happened at all with the exception of a spike on the charts. Lots of new and retail traders get sucked into those moves and end up buying at the top or selling at the bottom only to watch the market move against them dramatically.

An example of a time that we can apply this trade is when a central bank announces a rate adjustment when the market was expecting no change. In these circumstances it’s hard to see a trade ever losing but these instances are also rare.

Another example is if something really unexpected happens completely out of the blue. For example, if a central bank member was giving a speech and then said something totally unexpected and out of character this would also get the market moving in a sustained manner.

This trade setup should not be used on small data points that have a deviation from the expected figure because it is better to trade those on pullbacks.

We also need the sentiment at the time in the right order to get any kind of tradeable move such as positive sentiment that is suddenly and instantly changed to negative from whatever the news was. As long as the event was extremely unexpected and has a direct impact on the markets expectations for the central bank’s monetary policy then you are probably good to consider this type of trade setup.

The method for taking advantage of this is rather simple. You make sure that you enter the market right before or at the close of the first 5 minute candle after this surprise event has taken place. Stops can be placed either the halfway point of the candle or just above or below the 5 minute candle away from your entry. This will be something that you perfect over time with practice with this type of trade.

Targets should be based on normal things such as old highs or lows and average daily range of the pair. You can also hold for longer if there is a solid fundamental reason supporting the move and the market has a clear expectation of where the price of the pair could get to in the long run. The main point is that you should be getting in within 5 minutes of the initial event to ensure that you make some pips from it. This requires you watching and listening to the news feeds intensely but when you get a few trades like this each month it will be worth it.

Trading with the News Feed

Most traders working at professional firms become day traders because this is a good combination of regular trading activity while keeping risks limited. The news feeds are the main source of all our information and trading opportunities. Without these feeds you would be effectively trading blind so we will now look at finding trades that come from the news feeds each day.

Day trading the news feeds is actually fairly simple and is one of the best ways to find high quality trading setups. Day trading is not as precise as trading and scalping key levels because the main thing behind a successful trade is not the place that you enter but rather the reasons for the move.

Let’s walk through a typical day of scanning the news feed to get an idea of the type of things we are looking for.

Your analysis starts an hour or two before the session opens as you are reading the overnight or pre-session news and you are looking for core items that traders getting to their desks are likely to react to. This does take practice to master but the golden rule of sentiment is that the more something is known the less of an impact it will have on the market.

You are looking for surprises or changes in the tone from central banks or even breaking news that could change the markets view on a specific currency or how the central bank may approach its interest rate adjustments in the future. If you see something of note then the next step is to plan your trade.

At this point you may have found a trade and you can either jump straight into the current market price or try to wait for the price to pullback to a nearby level of support or resistance. The risk of jumping in is that the price might pullback first and you could potentially be sitting in drawdown which means you will need a larger stop loss to accommodate this. The risk of waiting for a pullback is that you might miss the move simply because there may not be a pullback given a clear reason to trade it from the open.

How do you decide what to do in this scenario? The best way to know how to react to the details of market information is simply practice and experience. For example, the first time you see a safe haven flow you may think that the market has gone too far too fast but it then continues for several hundred more pips before thinking about pulling back. We can sit here and tell you all about how aggressive safe haven flows tend to be but until you have actually seen one in full force in live market action you won’t fully understand the concept.

Remember, you are now past the training stage and as soon as you start placing trades on your practice account you will be at the skill building stage which is where you will get develop your experience. One of the best ways to build your skills is to practice them in the live markets as much as possible.

Trading Tip:

One tip to help your trading at the start is to split your position into two pieces. You can enter one at market and enter the other at your proposed area of support or resistance should the pair pullback to that level. This gives you two chances to jump into a trade but only risking one full unit of risk. If the trade takes off straight away then you get to at least make a half profit and if it pulls back you average your positions at a slightly worse price then the area of support or resistance would have offered but you still are only risking one unit of risk on the account.

This is only a starting technique to assist you in the early months because after a while you will start to see a pattern in your trading that will give you a natural confidence of when to trade and place your orders. This will give you a nice day trade that you can hold as the session plays out. Because you are tracking every trade this will also give you lots of data to look back over to see if over the long run it would be more profitable for you to jump straight in or wait for the pullback.

Obviously you will need to have a stop loss in place and a take profit in mind. Generally you want your stop loss orders to be between 25-50% of the average daily range away from your entry and your target should be where the market has reacted from in the most recent sessions. It’s generally not effective to try and day trade past an established high or low because this will result in losses and not cashing in on good trades at the appropriate times. The best technique is to take your trade off just before the top or bottom of these levels. It is never wise to think the market will make a new reaction high or low unless there is something extreme happening at that time.

What happens if you do not see a trade at the open?

You keep watching the news feed and switch to a mode where you are looking for surprises or comments that the markets are not expecting but will view as fresh reasons to trade a pair in a certain direction. These come through as headlines and there are no set standard of news or phrases we can list but the golden rules of sentiment are key here.

Generally, we are looking for an announcement from a central banker or comments from someone else closely related. For example, look for things like a dove commenting that rate hikes should be coming sooner or a hawk stating that there is a strong reason for rate cuts. These are things that can be perceived as out of line with their traditional stance.

Typically, the premium news feeds will have a list of the current hawks and doves for each central bank as part of their service. However, you can get a list by doing a Google search just as easily.

This is something that you will get better at over time so we suggest that you make this one of your staple strategies and start practicing it straight away. By keeping your eyes on the feeds for these types of comments or for breaking news that could cause the markets to panic and buy safe haven currencies you will start to see trade opportunities almost daily as the headlines appear and the prices react.

To get a good feel for how this plays out let's go to the feed and look at the kind of things that we could use to find a possible trade opportunity to give you a good starting point.

As you can see, day trading the news feed does not always apply to some of the technical concepts we have talked about in this course. The main focus is on the fundamental or sentiment reason for the trade rather than where you should specifically get in or get out. It is very important to understand that trading is not something that can be turned into a mechanical system or method that you do blindly over and over again. Rather, it is something that you will get better and better at over time by applying the correct concepts and then practicing and learning from each trade you take.

How to Scalp Using Real Time News Feeds

The concept of scalping the real time news feeds is that you intensely monitor the news feeds for any information that could change the current market sentiment and drive the price of a currency over a short period of time within the trading session.

The kind of news that you want to look out for are:

Comments from central bank members that have a different tone from how that specific member usually talks. For example; dovish comments from a central bank member that is known to be hawkish.
Another would be a geopolitical event like war.

The key here is the market needs to have its expectations abruptly changed in the short term. These news trades are short term trades looking for 10-40 pips depending on the how large the average range for the pair is. The larger the range of the pair then the more potential pips there could be in a scalp trade. The smaller the average daily range of the pair then the less potential pips there might be in a scalp trade.

In order to trade these you simply need to know what is normal to the market and what is not normal. This will take time and experience in watching how these real time news events play out.