How to go about trading the news and more: Key points covered in this podcast:
– Looking for breakouts when trading the news
– Can economic factors co-exist with technical analysis?
– When going against public sentiment works out
In this edition of our podcast Trading Global Markets Decoded, our host Martin Essex is joined by James Stanley, a seasoned trader and prominent currency strategist here at DailyFX. Revealed this time: Secrets to trading the news, how to marry fundamental and technical strategies for consistent results, and recognizing when to go against public sentiment. Benefit from the discussion with James Stanley and listen to the podcast by clicking on the link.
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Trading the news: The lowdown
Talk begins on trading the news – a common area of interest particularly among newer traders. James says that when a big event like FOMC or a European Central Bank rate decision comes up, markets have a tendency to consolidate ahead of the event – making it not such a good time to be trading trends.
“But it’s a pretty good time to start looking for breakouts, and once the breakout happens out of that range, there usually can be a trend to work with that might last for a little while.”
With this in mind, setting up a breakout strategy, a trend strategy and a range strategy can give traders the best chance of success. “That’s been the driving force of my strategy for the last 15 years or so.”
Typically, James will take a step back around these news events and look at a four-hour or daily chart, seeking what he calls a ‘deep discount entry’.
“Say I have a resistance zone on USD/JPY and I get a quick rush of USD strength around an FOMC announcement. If I can get prices running into that resistance zone followed by a stall indicating there’s some short term sellers showing up, I can use that news bump to try and work into a longer-term short side swing trade.”
Technical and fundamental strategies: How do they interplay?
James follows both technical and fundamental strategies on the markets. “For anything I set up, it’s largely coming from a technical analysis bent, where I’m looking for a [minimum] 1:2 risk/reward setup, but I govern that with fundamental analysis.
“Other than that, I’m looking to buy low, sell high, and ride the trend until it runs into some level of resistance that might open the door to short side swings.”
Martin asks: How do you combine economics – which tells you ‘A price will revert to its mean’ – with technical analysis, which says ‘If there’s a trend, follow it’?
“Well, if the signal conflicts too greatly, I just walk away,” James says. “You don’t always have to be involved in the market. You go in when there’s an opportunity, with risk/reward potential.
“If I see a brutal selloff in a market over four or five days, I’m usually not automatically looking to fade that move or wanting to buy it, but if I get prices building on a long-term level of support, and support postulates there for a day or two, then I look at that.
“I could put a stop there and if that low doesn’t hold, I’m out, but if it does get a bounce, I can get two bucks for every one I have to risk, and maybe three or four.”
The keys to going against public sentiment
If the entire world seems convinced on one direction, it could be time to take the opposite stance, James says. He uses an example of the Euro in 2014-15 when the ECB started to employ quantitative easing. “It was [seen as] a foregone conclusion that EUR/USD was going to parity – but it never happened.
“When we get public sentiment shifted in one direction, these reversal types of scenarios are most interesting to me. Because if everyone in a market that wants to be short is short, how’s price going to go down any more?
“That usually the area where reversal setups are most attractive. So I get something like that long-term level of support building, that’s usually interesting.”
Mastering your emotions and taking control
How do you manage your emotions when trading? It’s different between people,” James says. “Some folks are naturally stoic, and someone like that may have a leg up. It doesn’t mean everyone else has no chance, but you have to control your reaction to those emotions.”
The best way is through experience, James says. “[After losing trades] you build up calluses where the pain isn’t really pain any more, just an annoyance.
“The tough part is getting to that experience level; that’s expensive in terms of costs.”
James adds that the number of ‘instructional’ voices online can muddy the waters when trying to build experience. “You see someone pitching themselves as a hotshot trader riding in a Lamborghini, but the car’s probably rented, they’re trying to get people to a website to buy an [expensive] course and sell a dream.”
That shifts the expectations for people in the wrong direction. “You can’t take a two-week course and instantly make a lot of money; the reality is it’s hard work.
“To me it’s worth it; I have friends who went to medical school, they still have student loans, and I do better than them.
“But trading’s like anything else, it’s going to take four or five years to get your bearings and learn what you need to know to be successful.”
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James Stanley can be followed on Twitter at the handle @JStanleyFX. Also, check out his and other DailyFX analysts’ views on Analyst Picks.