How to trade economic news

Many traders think that watching the news is very important and on the surface that would seem to make perfect sense but…

The problem lies in the fact that there are can be hundreds of new economic and political news stories coming out around the clock. With that many, it is easy to get information overload and become so paranoid that it is impossible to take a trade.

Even if you spent every waking second reading the business newswires, you still wouldn't know everything. In addition you can never be certain how the news will effect the market. To compound the problem further, you can be certain that there will always be market insiders that get the news before you. The bottomline is that no matter how well informed you are, you can never know everything.

Until a trader learns to accept this, they will have a constant sense of uncertainity about whether they are making the right decision or not.

Since I am a technical trader I don't worry about news as I view it as a force that helps create the necessary volatility in the markets. Without volatility there is little movement and follow through.

Another reason you can't worry about news too much is because we can't always control when it comes out. For example say you are in a trade and war breaks out or another 9/11 type event occurs. Those type of events thankfully are very, very rare, but the bottom-line is we have no control or advanced warning over unforeseen events. The only thing we can control is to place protective stops to minimize our losses. (Note: Stops may not protect you if catastrophic news hits the market)

Also don't forget that really good unforeseen news can cause losses for you if you are trading in the wrong direction.

What I mean is… Say you are going short in a stock because the company is not doing well based on its performance over the past year. Even though your analysis is right, there is always a possibility that really good unexpected news within the company could cause a rapid reversal of the down trend and cause you to have significant losses.

One last thing to remember is that there will be times you are in a trade and news hits the markets that may quickly add another few hundred pips to your profit level. Many traders only think of unexpected news as a source of losses.

With all this said, it doesn't mean I throw all caution to the wind regarding news either. Anytime there is a major news event coming out I will either exit the trade I am in or wait to initiate a new trade.

Fed Comments Pushes The Dollar Down

A recent speech by Ben Bernanke, chairman of the US Federal Reserve Bank, sent the Dollar spiraling downward to fresh lows against all of the world's major currencies. This is perhaps surprising, given that Bernanke used the speech to warn that higher-than-expected inflation may drive the Fed to hike rates, which is exactly what Dollar bulls wanted to hear. The downside of the speech, reflected in the markets' reaction, was that the primary cause of the inflation is rising oil prices, would could plunge the US economy into stagflation: slow growth and high inflation, an unenviable position if there ever was one.

Forex News: USD Mired Near Lows

The dollar’s woes were exacerbated as more evidence of problems in the subprime mortgage market were revealed yesterday – triggering a sharp sell-off to record lows against the euro at 1.3786 and a new 26-year low versus the sterling at 2.0285. The heightened risk aversion also prompted speculators to scale back carry trade positions, sending the yen sharply higher – climbing to 120.96 versus the greenbucks and recovered from all-time lows against the euro.

The main catalyst was attributed to S&P’s announcement that it would possibly downgrade nearly $12 billion in subprime mortgage-backed US bonds. The move could potentially add more instability to financial markets and raising warning flags of spillover effects to other sectors of the economy. Also boding poorly for the housing market and consequently, the US economy were earnings reports – in which Home Depot signaled further weakness ahead by issuing profit warnings due to the housing slump.

The euro finally surpassed its previous record high against the dollar set in April, jumping to 1.3786 amid renewed fears from the US housing market. The single currency is poised for further gains this week ahead of several key Eurozone economic reports, set to reveal greater divergence between the US and Eurozone economies.

Source: forexnews.com
Author: Korman Tam

This gives the answer why carrys are unwinding at the moment and support my analysis of a long term bear bias is still intact.