Have you ever had a long position during an economic news release and the news was bullish? Remember how excited you were that this news was going to help you make more money? And as the news filtered out to global traders everywhere, price did go higher. Then suddenly, price began to fall quickly. Within seconds all your profits evaporated, and suddenly you were underwater and sinking fast. How did this happen?
You hear the expression "buy the rumour, sell the news." Well, that works some of the time. As with most trading analysis, some of the time, isn't a valid strategy. If we dig deeper with the right tools, we find that there is a market structure that explains these counter intuitive price movements that surround economic news.
The real truth is that many times, the path of price is already mapped out before trading starts. The map is heavily influenced by relationships of institutional order activity. Unfortunately, the map is invisible to most analysis. The good news is that Market Gravity is the tool we can use to illuminate and read this map.
Market Gravity will predict if price will trend or trade in a range. For example, if the forecast is for a trend higher, then we expect that if an economic report brings bearish news, the initial selling for this bearish news will be overwhelmed by the need to trend higher.
In our notes for EUR/USD homework (London session) applied to Wednesday May 8, 2013, Market Gravity forecast a strong up trend. We said:
"...Use trending indicators to stay long. There's a medium importance economic release at 6 AM Eastern it's the German industrial production number of previous -1.8% expected -3.8%. Any bearish news should be faded and provide a good buying opportunity. Any bullish news should add fuel to the rally."
The news was bullish and price did move higher. The high of the session traded in the closing minutes. In this case, the news and the price move made "sense" to most traders because they associate bullish news with rising prices. To Market Gravity watchers, the price move made sense because price needed to trend higher whether the German industrial production news was bullish or bearish.
In our notes for EUR/USD homework (London session) applied to Friday April 26, 2013, Market Gravity forecast a strong down trend. We said:
"The US GDP number arrives late in the London session. This will play into the trading. It is impossible to know where price will be just before the release. However, if news is bullish, sell the rally..."
The US GDP news was bullish and the short rally that followed set the high for the rest of the London session. In this case, most traders rationalized that the news was "already priced in." In contrast, Market Gravity watchers expected that price would trend lower; selling the brief rally after the news release made sense in the context of a down trend.
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Alan Gunn, M.Sc., CFA, CIM, DMS, FCSI has over 30 years experience in investment management and derivatives trading including Chief Investment Officer of an algorithmic hedge fund engaged in forex trading.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.