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When you come to a fork in the road take it.

Yogi Berra

As many of you know I trade fundamentals while K generally focuses on technical ideas. One of the problems as well as advantages of my trades is that they typically move fast. The good part however, is that most of my trades are clearly spelled out on the economic calendar and therefore allow us plenty of time for preparation.

This week I decided to try out an experiment by posting my thoughts on particular event 15 minutes before the news release. The news in question was the New Zealand GDP release and here is the transcript in all of its misspelled glory (for those of you who don’t know I am undoubtedly the world’s worst typist)

Mar 29 6:30 PM [Boris] Hey everybody

Mar 29 6:30 PM [Boris] we are awaiting NZD GDP which is expected to print at 0.9%

Mar 29 6:32 PM [Boris] The unit has been string all day currently trading 7147 as carry trade buying has boosted the currency since Asia yesterday. The US stock market rallied to recover its losses, so risk appetite is back.

Mar 29 6:33 PM [Boris] We'll see how the numbers print. If there is a big miss to the downside then it sets up one of my favorite trades

Mar 29 6:36 PM [Boris] Where the techs are highly overbought and we have a negative funda surprise. NOte on the charts that NZDUSD has a double top @ 7200 which shuld serve as strong resistance. On the other hand we need to keep in mind that last three times the GDP number was only good for 20-30 point sof continuation, so targets will most lilkey be modest if we do have a trade

Mar 29 6:36 PM [Boris] Release is at 18:45 EST so lets see what happens.

Mar 29 6:46 PM [Boris] NZD print 0.8% vs 0.9%

Mar 29 6:46 PM [Boris] a small disappintment

Mar 29 6:47 PM [Boris] but not horrid

Mar 29 6:47 PM [Boris] both housing and sepending are up

Mar 29 6:48 PM [Boris] this may push the kiwi lower, but the news is not bad enough for me to act

Mar 29 6:50 PM [Boris] One of the things that makes me hold off is tonight's JPY CPI numbers which are expected to be weak.

Mar 29 6:52 PM [Boris] and that my create more carry support which would push NZD higher. On the other hand I will keep an eye on this for rest of the night. Because if JPY data proves better than expected then NZD may weaken later in the night. But overall this number is not weak enough to make the market doubt further RBNZ rate hikes, so for now we are going to stay pat.

Although there was no trade on that event many of you wrote that you liked this new approach because it helped you not only to see new trade ideas but to follow our analytical process in real time. So I will certainly continue to do this and from now on I will email you a note ahead of time whenever I see a news release on the calendar that may turn into a tradable event.

But today let’s explore the idea of news trading a little further. The standard approach to news trading follows the following methodology.

1. News event surprises varying widely from consensus
2. Price action reacts to the surprise moving in the direction of the news
3. Trader follows the price action, looking for continuation as other market participants react to the news.

Often this approach works well. One the reasons why I like to trade fundamental setups is that in absence of any other developments, news in the FX market will dictate direction and if I am trading on the side of the news I an usually trading with strength, However, in trading as in life there are always two sides to every story. Sometimes the news is not strong enough to sustain much of a follow through and after the initial reaction the markets will change and trade the other way. Now novices who still believe markets are rational and expect to bank profits with the regularity of a bureaucrat collecting his paycheck such an illogical turn of events can be shocking. However, the fact of the matter is every time we consider an idea we are faced with the following question – trade or fade? In other words do we follow the news or ignore it?

This week we had one instance where the news trade worked:

Short USDCHF +34

This was a very clear cut trade. Earlier that day I was on CNBC squawk box and said that if new home sales printed at 1M annual run rate or better, the dollar would rally but if demand for New Homes cratered the dollar would come under strong selling pressure. Sure enough the 848K print was so much worse than expected that the dollar quickly slid and we made 34 points in less than 20 minutes

One instance where the news trade failed

Short GBPUSD -22

The UK Current Account deficit widened considerably worse than expected to –12B from –8B, but CA is not a huge market driver, The trade went into our favor for about 10 points, but that was all that this news release was good for. News trades depend on two factors – surprise and importance. I had one but not the other and should have stayed away.

And one instance where the news trade left us flat

Long EURUSD 0

We generally hate to trade on Friday afternoon because markets thin out and we have a rule of never holding trades over the weekend. But the news that US imposed tariffs on China for the first time in 20 years was certainly unique and so we felt it was worth the risk. The trade came to within 8 points of our target but in typical Friday fashion reversed so quickly that we had no time to take profits. We closed at breakeven which proved fortunate as late afternoon profit taking pushed the pair lower.

So the question still remains when do you trade news and when do you fade it? The answer ironically enough may lie in technicals. If price recovers to its pre-news release levels, that is typically a good sign that a fade trade may be in offing. In short, it means that traders rejected the importance of the news and decided that the opposite argument was stronger for the time being.

Take a look at the GBPUSD trade

http://docs.google.com/Doc?id=dn8z7zs_83f8ntsq

As well as the NZDUSD trade I passed on.

http://docs.google.com/Doc?id=dn8z7zs_85hcfpqs

In both instances once price cleared the pre-release news levels going in the opposite direction of the most recent news proved profitable. Jesse Livermore once said that our job as traders was not to join the bull side or the bear side but to join the winning side. I hope that today’ s discussion of the news trade helps you to do that.

Finally our two other trades this week were generated off techncals.

Short NZDUSD 0

This trade was +25 in the money but ran into great Trade Balance numbers from NZ so we were stopped at breakeven

Short EURUSD –35

This was perhaps the most frustrating trade of the week as it just managed to stop us out when German unemployment data printed far better than expected only to turn and go our way. We could discuss endlessly the woudda coudda shoudda ramifications of placing stops just 6 or 7 points higher, but the fact of the matter is that this was simply a busted setup. It was based on out MAMACD strategy in the book but like all trading strategies it does not work every time and this was just one of those cases.

In the meantime we both wish you a good week-end and a great week ahead

B & K