How to react to economic data – sit up or sell up?

December 3, 2017

By Adinah Brown

The big announcements is around the corner, and the markets sit poised, waiting. All of the analysts have an opinion on the expected announcements, the bears predicting the end of the world and the bulls predicting the beginning of glorious new highs. Everywhere you look, talking heads are predicting the direction of the market, consensuses are being put together by economists and the market is oscillating, tracking sideways on whispers and intrigue.

The news is upon us and it is time to determine what the exit strategy is. Do you sell or do you hold?

If the news is a larger, more important announcement, expect significant volatility once it is announced. There will be a lot of people in the market, and a lot of buy side and sell side activity. Volatility will increase the spreads and the chances of slippage. This factor needs to be taken into account because it cuts into profits and can potentially mean that the stop loss is missed. A large position can be a high stake game when trading an important piece of news.

One of the things that tends to happen after an announcement is a swift spike in the direction of the news. Traders quickly start to close positions to lock in profits or risk manage losses. New pending trades are executed, pushing the market further. Volume increases as new traders attempt to ride the wave. Whilst this phase is going on, contrarian traders are opening positions, ready to pounce on a wave that has overshot real value and profit from the decline. Often, a correction occurs and again traders scramble to open new positions or close losing ones. Scalpers quickly trade every move as the market reverses and swings errantly.

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This phase can sometimes continue to post new lows or reverse quickly as new traders attempt to catch positions as they fall to attractive levels again. The market will often then correct itself a few times, each time reversing in smaller and smaller proportions until these converse factors play out and the new equilibrium is established.

One realistic method for trading these is price action trading. Normal lagging indicators are of no use in this market, since the movements happen too quickly to be captured by these indicators. Attempting to pick the sentiment of the market is pretty much impossible, since it is basically a trading frenzy, with trades being placed in both directions at the same time to catch whichever wave each trader thinks will net a profit. Price action trading simplifies the decision making process and allows the trader to react to the charts quickly. Long and short positions can be opened and closed quickly, locking in both the profit or preventing the loss.

Another method can be to set pending positions at a certain point that indicates an already strong movement in the profitable direction. This should be accompanied by a generous take profit and semi tight stop loss. It should also be watched carefully since the volatility could miss the close and a manual close might be needed.

For those that have positions prior to the announcement, with all the activity going on, it is best to set a generous take profit and wait to see if it is hit. If you want to hold the position for a long period, a hedge prior to the announcement or a pending hedge position might be better than a stop loss, since it allows your position to be open until you want to terminate it. This will allow you to close not only at the price point you want, but at a time when the volatility is not so high, preventing spreads from taking a significant part of your profit. It will also give you the chance to continue to hold that position, riding it to the new highs that the announcement has provided.

The decision to hold or sell ultimately depends on what you want to get out of the position. Of course, the only right answer is whatever nets you the most profit.

About the Author:

Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.