Trading a surprise beat or miss in an economic release can be a very profitable thing to do. Depending on the type of release, and the extent of the surprise, there can be some large movements in price. Market participants are always trying to price in the fundamental information into a currencies price and economic releases create part of the ebb and flow of normal price movement. The below article outlines three different approaches that you can take with a surprise economic release.
#1 Enter at market price
In this situation, you will enter at market price as soon as, or shortly after, the release comes out. This is only for the highest conviction trades and the most significant news releases. As price can move significantly upon news releases the last thing that you want is to be buying at the top of a spike which retraces or vice-versa. In order to avoid this, you must be selective about when to enter at market. The best sort of time you want to enter at market would be in the situation where a central bank surprises markets with an unexpected rate hike or cut.
Your target for this type of trade would most likely be a major daily support or resistance level, a big round number, or a major pivot point.
#2 Enter on a retracement
Entering at a retracement is for when the surprise is significant, but not so significant so as to enter at market. It can be a little subjective to decide when this is, but it is generally on lower deviations which are likely to result in smaller moves. In this scenario, by entering in on a retrace, you are able to limit your risk more easily than if you just entered in at market prices. The only weakness with this approach is price may not retrace and you may miss out on a potentially profitable trade.
#3 Enter at pre-data release
This third approach that we will discuss is when you are trying to pre-empt the news. Now, this may sound just like flipping a coin, but it may not be. Perhaps you know a central banker is about to speak and you know that since the last time the central banker spoke the economic data out of the country has been bad, then you might want to be short ahead of the speech. You are expecting a more dovish shift. The obvious hazard with this approach is that you get taken out by widening spreads pre-release or the news is the opposite of what you expected and you are stopped out with some slippage too.
One good way of using this approach is by looking at market expectations. Say for instance you know that a market is very focused on inflation and you can see that the next data point on inflation is projected/forecast to come out low you can position yourself before the release. This takes experience to do, but come along to our weekly webinars in order to find out when you can use this approach. Many professional traders use this method all the time to try and get the best possible entries.