Let’s look at how to trade the news in a trading situation with a directional bias.
Returning to our earlier illustration of the US unemployment rate report.
Scenario: If the US Unemployment Report indicated progress, why did the USD continue to fall?
We previously discussed what might happen if the unemployment report came in at or slightly above forecasts.
In this situation, suppose the unemployment rate fell unexpectedly.
That’s a good development because it means more people now have jobs.
But, according to your statistics, the dollar is FALLING!
Isn’t the dollar meant to rise when the unemployment percentage falls?
There could be a couple of explanations why the dollar continues to fall despite the fact that more people are working.
Reason #1: Overall Economic Outlook Still Poor
The first explanation could be that the long-term and overall trend of the US economy remains negative.
Remember that several basic factors influence an economy’s strength or weakness.
Although the unemployment rate has decreased, it may not be a significant enough catalyst for large traders to begin changing their view of the dollar.
Reason #2: Positive Employment Numbers Are Temporary
Perhaps it will be immediately after Thanksgiving, during the holiday season. Many businesses recruit seasonal workers during this time of year to keep up with the influx of Christmas shoppers.
This job growth may result in a short-term drop in the unemployment rate, but it is not indicative of the long-term prognosis for the US economy.
A better method to get a more accurate picture of the unemployment situation is to compare last year’s figures to this year’s. This would enable you to determine whether or not the job market has improved.
The key thing to remember is to always take a step back and look at the big picture before making any snap choices.
Now that you have that knowledge, let’s look at how we can trade the news with a directional slant.
How to Trade the News With a Directional Bias
To make things simple, let’s continue with our unemployment rate example.
The first thing you should do before the report is to look at the trend of the unemployment rate to see if it is growing or decreasing.
You can plan for what might happen in the future by looking at what has happened in the past.
Assume the unemployment rate has been consistently rising.
It was 1% six months ago, and it reached 3% last month.
You can now state with some certainty that jobs are being lost and that the unemployment rate is likely to rise further.
Because you anticipate the unemployment rate to rise, you can now begin planning to sell the dollar.
This represents your directional bias.
You have the impression that you could sell USD/JPY in particular.
You could glance at the price movement of USD/JPY at least 20 minutes before the unemployment rate is scheduled to be announced to determine the range of movement.
Take notice of the high and low points. These will be your breakout points.
You would pay special attention to the lower breakout point of that range if you have a bearish view on the dollar (your directional bias).
You anticipate the dollar to fall, so an entry point a few pips below that level would be a sensible strategy.
You could then set a stop just at the upper breakout point and set your limit for the same amount of pips as the breakout point range.
You later notice that your target has been hit. You just picked up a fistful of pips!
The key to developing a directional bias is to thoroughly grasp the concepts underlying the news report on which you intend to trade.
If you don’t comprehend how it affects specific currencies, you might get caught up in some bad setups.