Many short-term traders base their decisions solely on price charts, regardless of which markets they are trading. It's common for traders to completely ignore fundamental factors and instead follow trends, analyse support and resistance levels and weigh up the various signals their technical indicators are giving them as they attempt to figure out which way the price may move next.
News and economic announcements such as the US non-farm payrolls, GDP figures, interest rate announcements, inflation data etc can significantly impact the markets, especially when the data announcement is not in line with what the markets had been expecting. Paying attention to these announcements can, therefore, prove vastly beneficial to traders and one can significantly strengthen their trading strategy by adding economic announcements to their purely technical and charting approach.
Here are three reasons why paying attention to economic announcements can help even the most dyed-in-the-wool chart follower and add an extra edge to your trading approach.
A lot of traders are happy that their charting strategy is proven and delivering profits. They don’t want to cloud their market view by having their own bias about what the fundamentals might say. In fact, they think that their opinion will be fairly insignificant in the wider scheme of everyone else's buying and selling decisions. But we all know that certain major economic announcements often bring additional volatility in the markets, even if it's for just a short period of time.
Even the neatest chart pattern can temporarily be thrown out of sync by a significant announcement, such as the latest unemployment news, or what a country’s central bank thinks it may have to do in the future regarding interest rates.
Paying attention to when these announcements are due can mean you don’t end up placing a carefully planned trade a few minutes before something happens that could instantly trigger your stop loss. It’s often far more sensible to wait for the dust to settle after such news events have taken place, and then see if the reason for the trade is still valid.
There is normally a consensus amongst leading economists about what level an economic announcement is likely to come in at (for example the non-farm payrolls or GDP or inflation data) and its resulting likely effect on the market. For example, low unemployment suggests a strong economy, so many would expect the stock market to rise. A decision to lower interest rates should make a country’s currency less attractive, causing it to fall against other world currencies.
From time to time, however, economic announcements come in very different from what the broader market was expecting. At other times, market reaction can be opposite to what could generally be expected. For example, if a central bank drops some broad hints that rate cuts may be coming, but the currency still rises, it’s a suggestion that there could be other factors at play here in addition to the prospect of interest rate changes.
This could, in turn, prove to be a strong buy signal. If the currency does not drop on an expectation of a fall in interest rates, then positive sentiment is strong and could possibly indicate that it's a buyers market.
A lot of traders try and identify trends in the hope that they can jump on to the trend and turn a profit. Such trends could range across minutes, days or even months. But all trends reverse at some point, and a change in the underlying economics could be the first sign of this.
As a trader, it would therefore be useful to see if, following the announcement, big levels are being broken on the chart. Is the upper hand in the market switching from buyers to sellers or vice versa?
Every journey starts with a single step and this is true of trend reversals as well. An economic announcement is seldom enough to swiftly change a medium-term trend, but how the market reacts to surprises can give the first clue that maybe sentiment is starting to shift, thus offering an opportunity to potentially get in at the start of a new trend.
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CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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