Trader Tip: Expectations Filter We often get asked about trading economic news events, and whether it is a good idea and/or how to use them in our trading. In general, we advise using these reports as a trade Filter to avoid trading, especially big news reports as in can be akin to going to the casino with undermined and sometimes catastrophic results. However, for the more advanced trader, one could consider this type of indicator if set within its proper framework. In this Blog, we shall discuss this.
First off the expectations game. This is often thought to be when something does not perform to what it is expected to be. When this gets violated it creates a shock and a response. We see this often in the markets. There are two parts to this. Expectations of the news report itself (consensus expectations vs. actuals) and whether this expectation is already, or not, priced into the markets. All this requires some good understand of the news events and not for the novice trader. It should be also noted, regardless of your experience level in trading, this expectations game is dubious, if you are a trader prone to emotion. You may over or under state these expectations – one has to be very honest with oneself.
So, instead of trying to out think all the other analysts and manage your emotions, let the market tell you what these expectations are via the price action itself. To try to attach this thinking to an actual Trade Plan, in the attached graphic is an example of both cases of how a positive or negative report’s effect on the market can be played. In the first example a market is trending down and a positive report to the instrument barely gets a bump to reverse the trend of the 20MA – it can’t even break the most recent swing high/low of the trend. This signals that the market truly does want to continue the trend it is on. In the second example, the negative report causes a break in the trend and/or sideways price box. In this case, it would support a Trade Plan that might address a trend reversal or breakout strategy. In both these cases, the news report is not the Trigger. Rather if you already had an idea to take a position via your Trade Plan, and the news event does or does not support the Trade Plan’s trade direction, this is a potential additive Filter to avoid the trade. The following are key summary points to keep in mind to use this type of indicator Filter:
- Understand well the economic report, the schedule of release (see scheduled economic reports, though not limited to scheduled reports), instrument(s) it applies to, the market expectation and what would be a potential surprise to the market if the expectation is not achieved.
- Avoid insignificant and/or bigger news events, as these events will be harder to use as a trade indicator.
- In general, do not try to trade the actual news release – a fools game. Rather trade its after effects.
- Never use this thinking as the centerpiece of a Trade Plan, rather as an additive Filter only. I repeat, use only as a Filter in a Trade Plan and not a Trigger.
We hope this helps a little in playing news events and playing the expectations game. Please see below a video presentation of this Blog post. If you have other questions you would like answered in this format, please do not hesitate to send us potential future Trader Tip topics. Click here, or watch below a video presentation of this Trader Tip.
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