How To Trade The French Election

April 23, 2017

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

If you are trading the euro, you need to be watching the election in France this weekend. While it is the first of two rounds with a final vote scheduled for May 7, the winner’s lead could set the tone for how European assets trade for the next few weeks. The race is coming down to 4 candidates – the far right Marine Le Pen, the independent Emmanuel Macron, the center-right Francois Fillon and the left-leaning Jean-Luc Melenchon who mounted a late-stage comeback to pull within striking distance of the other three. But with days to go before the vote, the race is still too close to call and that’s why it's so dangerous for the euro. Throughout this past week, the euro traded as if Macron was a sure win, which is a big mistake because even the polls show that the market is underestimating the possibility of a strong victory by Le Pen. The problem is that Le Pen and Macron couldn’t be any more different and depending on who wins, France will be put on very different paths. Good or bad, the world has gotten a taste of what this means with the U.S. election and the victory of Donald Trump. By the time some of you read this, the results from the election will be known, so instead of delving into who is the better candidate, we want to discuss a few possible scenarios:

BEST Scenario for EURO >> Macron and Le Pen earn the most votes & Macron wins with a comfortable margin

WORST Scenario for EURO >> Le Pen and Melenchon/Fillon earn the most votes & Le Pen wins with a comfortable margin

Now if Macron and Le Pen earn the most votes and Le Pen wins, the euro will fall with the extent of the decline determined by Le Pen’s margin of victory. The greater the margin, the greater the pressure on the currency.

As it is extremely difficult to predict the outcome of the election, the best way to trade the French Presidential election is to wait until the results are known. If the outcome is meaningful enough — meaning it creates enough fear or relief — the impact on the euro will last for days.

The French election should remain a focus for EUR/USDtraders until May 7, but the European Central Bank’smonetary policy announcement on Thursday will also be a key driver of EUR/USD flows. Since the last monetary policy meeting we have seen widespread improvements in the labor market, consumer spending and economic activity. Although German economic activity is down slightly in April, the measures were up significantly from February (the last readings before the March ECB meeting). The measures for the Eurozone were up across the board, led by improvements in France. Unfortunately the central bank’s hands are tied because inflation is low with consumer price pressures easing further in March. At some point, the improvements in the economy will drive up prices but for the time being, subdued price growth allows the ECB to keep monetary policy easy. Aside from the ECB meeting, the German IFO, Eurozone confidence and inflation reports are also scheduled for release in the coming week, pitting politics against economics.

The U.S. dollar could take a backseat with no major U.S. economic reports scheduled for release until Friday. While USD/JPY has held up well in the face of weakening consumer spending, inflation and manufacturing data, the greenback struggled against European currencies this past week. A lot of that had to do with euro- and sterling-specific drivers but USD's general resilience can be attributed to the complacency of investors who believe that the recent disappointments in U.S. data changes nothing about the outlook for U.S. monetary policy. The Federal Reserve is still expected to raise interest rates again this year with the rate hike likely to occur in September rather than June. The Bank of Japan also has a monetary policy meeting in the coming week and according to Bank of Japan Governor Kuroda who spoke on Thursday, the current pace of bond purchases will continue for some time. Like the ECB, the BoJ struggles with low inflation so Kuroda is effectively promising a longer period of accommodative monetary policy. While U.S. new home sales and the Conference Board’s consumer confidence index are scheduled for release at the start of the week, the main event for the dollar will be Friday’s first-quarter GDP report. Unfortunately, the pace of growth is expected to slow given the weakness in retail sales and trade and if we are right, this could keep the dollar under pressure.

One of the biggest stories this week was Prime Minister May’s decision to call snap elections in June. This announcement was completely unexpected as her office denied speculation as recently as Easter Break and it goes against her previous vow to not call another election before 2020. The announcement sent sterlingsoaring more than 2% on Tuesday but since then, the currency has struggled to extend its gains. The problem is that her bold move is not without risks. Of course she wouldn’t have made the move without some confidence in her victory and May is very popular despite the country’s division over Brexit. In a poll taken shortly after her announcement, May’s party had a comfortable 21-point lead. Her goal is to shore up political support for the decisions that will need to be made over the next few months. As May said in her speech, “The country is coming together, but Westminster is not.” Sterling’s reaction to the news is a reflection of the market’s confidence in the Conservatives who they believe will sweep the votes. If she succeeds like the market expects, the support of her people gives her strong negotiating power with the European Union. Even though retail sales fell sharply in March, data in general has been relatively healthy, allowing GBP to recover from its lows following the report. That said, the softness in retail sales and tradepoints to a weaker first-quarter GDP report.

The Australian, New Zealand and Canadian dollars had a mixed performance. While AUD and CAD experienced losses, NZD rose slightly versus the greenback. The biggest loser was the loonie, which was dragged down by lower oil prices and softer inflation. Consumer price growth failed to accelerate in April and that caused the year-over-year CPI growth rate to slow to 1.6% from 2%, the weakest pace of growth in 3 months. This softer inflation report was just what USD/CAD needed to break above 1.35 for the first time in 5 weeks. Canadian retail sales and GDP are scheduled for release next week and while the labor market is improving, retail sales also rose strongly in January, so there could be some payback in February. The Australian and New Zealand dollars only experienced modest losses. Both currencies were supported by stronger Chinese retail sales, industrial production and GDP data but AUD struggled on the back of dovish RBA minutes and lower copper prices. Because of volatility, the central bank wanted to look past the healthier jobs report. Australian consumer prices are scheduled for release next week and the CPI report is generally a big market mover for AUD. In New Zealand, on the other hand, data has taken a turn for the better. Service and manufacturing activity is up thanks in part to rising dairy prices and of that bodes well for next week’s New Zealand trade balance.

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Simple US NFP Forex Strategy

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This simple non-farm payroll forex strategy allows you capitalize on the most volatile moments in the forex market. On the first Friday (sometimes the second Friday) of each month at 8:30 AM EST  the non-farm payroll (NFP) data is released. This is the most trusted source traders, investors and institutions use to track the US employment situation, which sheds light on the strength of the economy and potentially inflation. The report causes a massive reshuffling in positions, and seeing a 100 pip movement in the GBP/USD in the moments following the announcement is not uncommon.

On a typical Friday, the GBP/USD will move approximately 100 pips (10-week average as of Oct. 22, 2013). On a non-farm payroll release day, intraday movement can be much larger. For current weekday and hourly volatility see the Daily Forex Statistics page.

Non-farm Payroll Forex Strategy Setup

The strategy uses the GBP/USD and a 15-minute chart. A 15-minute chart allows the initial volatility to subside, but still allows us to capture a large potential move once the market participants make a more rational decision about whether they want to buy or sell based on the news. This is the trend this non-farm payroll forex strategy attempts to capture…the rational trend which follows the initial surge.

The EUR/USD could also be used, but since the GBP/USD usually has a bigger daily range than the EUR/USD it provides great opportunity. A 5-minute chart can also be used, but is prone to more false signals.

Non-farm Payroll Forex Strategy Rules

1. Do nothing for the first 15 minutes after the NFP announcement. A wide-ranging price bar will occur between 8:30 to 8:45 AM EST. This bar is of no concern.

2. Wait for an inside bar. An inside bar is a 15-minute price bar where the high and low are completely inside a prior bar range.

Figure 1. Wide Ranging and Inside Bars for Non-Farm Payroll Forex Strategy – 15-Minute Chart

Figure 1 shows a wide-ranging bar followed by an inside bar. The inside bar doesn’t always immediately follow a wide ranging bar. Depending on volatility and the strength of the initial push, we may need to wait a couple bars in order for an inside bar to occur. The inside bar doesn’t need to be inside the wide ranging bar either, we just need a bar that is inside another bar. This shows us the market has calmed down, and is likely to soon choose its more rational direction.

3.  The high and low of the inside bar become your trade triggers. If the price rises above the high of the inside bar, buy. If the price drops below the low the inside bar, sell.

4. Place a 30 pip stop initially, or place it below the most recent low if you bought, or above the most recent high if you sold. But your stop should not exceed 30 pips.

Figure 2. Non-Farm Payroll Forex Strategy Entry and Stop Example – 15 Minute Chart

In this example, the initial inside bar which followed the wide ranging bar is used for the trade trigger. Following the initial inside bar, two more inside bars followed. This basically created a range, so in this case waiting for the breakout of that range was prudent. Either of these other inside bars could technically be used as trade triggers though.

The horizontal blue dotted lined shows the entry, which is set a pip or two above the inside bar high. The dotted line in the lower part of the screen marks the stop-loss order. Initially the stop loss is set to 30 pips, but in this case it was moved up to just below the recent lows, reducing the risk to 25 pips.

We do not need to wait for a bar to close in order to enter a trade. As soon as the high or low of the inside bar is pierced, take the trade.

5. Exit 4 hours after your entry. This is a timed exit. Once the trend begins it will often last for about 4 hours. If you enter at 9:15 AM, exit the trade at 1:15 PM EST. Exit at 2:00 PM EST even if it has not been 4 hours since your entry. By 2:00 PM other factors are likely to start affecting the pair, and most of the movement based on the NFP number will be exhausted.

6. Don’t take more than 2 trades. If you get stopped out on 2 trades, the movement is too choppy. Stash the strategy away until the next non-farm payroll number, or other high impact news release.

7. This step is optional, but you can implement some sort of trailing stop to avoid giving up your profit if the trend reverses while holding the position. As the trend progresses, move the stop to just below recent swing lows if you are long, or just below recent highs if you are short.

Figure 3 shows the whole GBPUSD trade for the  October 22 2013 Non-farm payroll release. In a rare event, the data was released on a Tuesday due to the US government shutdown on the Friday the data was supposed to be released. Ultimately the trade produced about a 54 pip profit at the 4-hour time target. Original risk was 25 pips, but could have been trailed up, locking in a profit, after the first consolidation. Sometimes wins will much bigger, and other times slightly smaller.

Figure 3. NFP Forex Strategy in GBPUSD with Entry Stop and Timed Target – 15-Minute Chart

Non-Farm Payroll Forex Strategy – Considerations and Pitfalls

Overall I have been using this strategy–or one very similar to it–for than 5 years, and find it to be a reliable strategy. It can experiences strings of losses though. The worst days are when 2 false signals occur in one day, which means 40 to 60 pips could be lost. This is rare, but can occur. Although, on any choppy day a trend following strategy is likely to experience more losses. Profits are usually much larger than losses on winning trades, which should more than offset losing trades.

If the GBP/USD doesn’t move much following the non-farm payroll announcement, then the news release is likely a “non-event” and the strategy should not be employed. Ideally we want to see a 50+ pip spike (up or down) following the announcement, which lets us know there is some reshuffling of positions and a trend is likely to ensue.

This strategy can be used on other major news releases, such as interest rate announcements, assuming there is a strong burst of activity following the announcement, and a valid trade signals occurs like in the example above.

As a final note, don’t take trades just before the announcement trying to predict which way the market will spike. Even if you guess right, you’re likely to experience extreme slippage, and therefore your risk is unknown. Better to wait for a valid trade signal like the one provided above, and trade the trend that happens after the spike.

This strategy is included in the The Forex Trading Strategies Guide for Day and Swing Traders eBook. Read the book for way more strategies and information you can use to conquer the forex market.

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By Cory Mitchell, CMT

Read the Original HERE

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How to Combine Technical and Fundamental Analysis

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One of the most common questions of new traders is: ‘which is better: Technical or fundamental analysis?’

While technical analysis can be performed on any chart, fundamental analysis, or the study of the actual components of the economy that represents a currency, can be quite a bit more subjective.

If this were a perfect world, we may have a direct and accurate answer to our new trader’s question. Unfortunately reality prevents it from being so. The table will walk through some of the differences of these two breeds of analysis:

Rare is the FX Trader that successfully traverses the terrains of markets with only ONE of these forms of analysis. Most traders have some elements of each comfortably in their repertoire. In this article, we are going to show you how you can do this.

Technicals Help to See What HAS Happened

Technical analysis has a very large role in the FX Market, perhaps even moreso than stocks or futures markets from where this analysis was popularized.

The art of Technical Analysis revolves around analyzing a chart – and strategizing an approach for trading it. There are numerous ways of doing this, and many traders like to include indicators, price action, and a whole flurry of other analytical systems for designing ways of placing trades in the present based on price movements of the past. The picture below shows just some of what traders are looking for in regards to Technical Analysis:

In the above graphic, there are four different mannerisms of support and resistance identified (the same 4 we covered in our How to Build a Strategy series), along with trend identification, and indicators to assist with the risk management approach (‘Average True Range in Pips’ custom indicator). All of these can be associated into the technical setup while arranging a trading plan.

We go over these technical components in the 5 parts of our How to Build a Strategy series. In each of the five component articles in the series, we go into much more depth around that specific subject matter. This is all with the goal of helping traders build an approach based on what has happened in the past with the prices that the asset has actually traded at previously.

This analysis can provide us with a great deal of information, such as being able to read the sentiment that may be on chart, or any biases that may exist. What it will not tell us, however, is the one thing that we most want to know – and that is what will happen next with regards to price. For that, we will need to introduce fundamental analysis into the picture.

Fundamentals Help Shape Future Price Movements

As news releases and additional data filters into the market, traders will accordingly bid prices higher or lower to account for this new information. News releases can often function as a 'motivator' to a market, promulgating future price movements. As such, this leads many to the conclusion that:

News releases can bring considerable volatility into the market, and trading based on fundamentals doesn’t necessarily mean that you need to trade the news.

As a matter of fact, traders can use what they have already built in regards to Technical Analysis to plan an approach around news events. The picture below will explain further:

The primary takeaway in regards to fundamental analysis is that large movements can emanate from each of these releases. And just like we looked at in part 5 of our How to Build a Strategy Series (Risk Management), traders need to know that there is a very real prospect of being wrong, and getting stopped out of the trade. So, for all strategies – it is advisable to trade with a stop so that one trade doesn’t end up doing irreparable damage to your trading career.

Combining Technicals with Fundamentals

Just as we had led off with in our How to Build a Strategy series, traders are often benefited by first identifying the market condition with which they are looking to trade.

For traders looking to trade trends, they want to see a ‘bias’ in the market. This can be done with Price Actionin a very concise manner: For up-trends, this can be a series of higher-highs, and higher-lows; and for down-trends, a series of lower-lows and lower highs. The chart below will illustrate in more detail:

When traders see these types of trends, they are seeing a bias in the sentiment of that market. During a down-trend, that bias is lower – and during an up-trend, the bias is higher. And during these situations, it’s not just enough to buy or sell and hope that we are on the right side of the trade.

Traders should look to buy up-trends cheaply, with price at support; or look to sell down-trends expensive when price is near resistance. Traders can use any mechanism of identifying support or resistance to assist with this process; but is of the upmost importance that traders realize that trends can reverse at any time (much like the above graphic shows a strong down-trend turning into a strong up-trend). As such, risk management should still be used even if it appears that there is a clear bias in the market.

To integrate fundamentals into this approach, the trader can look at the economic calendar as an opportunity to ‘buy cheaply, and sell expensive.’ The trader is looking to take advantage of an overreaction to a news announcement that allows for an opportunity to enter in a longer-term biased market. The picture below will illustrate in more detail:

In the words of our own Jamie Saettele, traders should look to ‘react to the reaction,’ of news releases; and traders taking the aforementioned stance towards trends going into fundamental data releases are doing just that.

Ranges and Breakouts

For traders looking to trade ranges and breakouts, the integration of fundamentals and technicals will be slightly different since no bias is being exhibited going into news and data releases.

However, the motive is much the same: Traders anticipate volatility coming from the news release, and they look to use this to their advantage.

While range traders should remain cautious when going into news releases (since additional volatility could pierce support and/or resistance with which they are using to set their stops), they can still look to take advantage of overreactions to news. The picture below will illustrate with more detail:

Traders in these situations would want to wait for news or data to cause price to go to support and/or resistance – and once a test of either of these levels are put in – could look to buy or sell accordingly.

Once again, the trader would look to ‘react to the reaction,’ of the news release – using their already prescribed technical setup of buying at support, and selling at resistance.

For traders looking to trade breakouts, they can, once again, look to use the reaction to the news event in the center of their trading strategy.

Traders can look to trade breakouts with any of the prescribed mechanisms of support and resistance, with the anticipation that news releases could bring in the wanted volatility to a) trigger into the trade b) move the trade closer to the trader’s profit target.

-- Written by James B. Stanley (Read the original HERE)

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Should You Average Down In Trading?

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Should you average down in a trade or investment?  A big question that many people have.  They play place a trade, then it starts moving against them.  They then start thinking whether they should average down for long trades, or averaging up for short trades.

After all, if you average down, your average price for the shares lets say goes down.  If the average price goes down, then all you need is a smaller bounce back up and you can get to break even or to profit.  Sounds seductively amazing?

Only problem is the more you average down, the more of your portfolio and equity in your account is at risk.    Any further market moves against you have a much bigger impact because you have increased your position size.  Also if the market has moved against your initial position, what makes you so sure that now after you have loaded up on a bigger position that the market will move in your favor.  You need to ask the right trading questions.  After all the market doesn’t care how big, or small of a position you have.  Well, most of the time the market doesn’t care how big of a position you have, but with hedge funds running multi billion dollar positions, sometimes the market does care, but that is for another article.

If you do plan to average down and put on a bigger size than what your risk parameters state, then you should at least have the order flow and liquidity on your side.

Typically trader psychology and money management techniques teach that you should not average down.  And for most people this is sound advice as they do not want to blow up their accounts.  They want to keep your account near it’s initial value so that when they learn the trading game, they can place the good trades with their full account equity and a not a depleted capital base.

There are however a few, or many exceptions to the never average down rule.

If you have a trading strategy where you clearly define that you will use a scaling in type entry strategy, then averaging down or up is perfectly normal.  This is assuming you have clearly positioned size to reflect this trading strategy.

If you have clearly defined what your position size will be at the various entry points, and what your total position size can be for the trade, then you can take no more risk than the other traders who are getting all in at once with one trade.

For example.

Let us say that you determined on April 26, 2011 that the Euro may experience a drop.  But you do not  know the exact timing of the move, nor what price the Euro will top out at.  Thus you do not want to get your full position size in all at one price.  You don’t know if the top will occur all in one day.  So you decide to prepare a scale in type of short strategy where you start selling EUR/USD every 100 pips.  You start building up a short position at 1.4700, and start adding every 100 pips to your short.  You get in one-third of your position at 1.4700, another one third at 1.4800, with the final one third position at 1.4900.  Lets say you have a stop loss for all the positions at 1.5050.

Let us say that you have an account size of $100,000 and choose a maximum of 3 standard contracts as your full position size.  So you sell 1 standard contract at 1.4700, followed by one more short contract at 1.4800, followed by the last short contract at 1.4900.  You have achieved your full position size of three standard contract, but you have scaled into the short position.  In other words you have averaged up.

In the above chart, I have shown the potential scale in strategy you could of used in the Euro.

If you had a $100,000 account and traded 3 standard contracts you would of:

• Shorted 1 standard contract at 1.4700
• Shorted 1 standard contract at 1.4800
• Shorted final 1 standard contract at 1.4900.
• Stop loss at 1.5050 lets say

Total risk for the trade if all three standard lots got stopped out at 1.5050 would be a $7,500 dollar loss.

Now contrast this with the other type of trader who just likes to get in the full position all at once.  Lets say the same trader made the decision on April 25 that the Euro should go down.  They choose not to use a scale in strategy. They should to just short 3 standard lots all at the 1.4700 price.  They too risk $7,500 so their stop loss would be at 1.4950.  In this particular market scenario the stop loss almost got hit.

Now in the end both types of traders still made money, but the scale in trader made more money because they got in some of their short positions at higher prices, while the all at once trader shorted the full position size at the 1.4700 level.

There isn’t anything wrong with either the scale in or all at once approach.  Both of those entry techniques can benefit from having better market timing.

Don’t let anyone tell you that averaging down for long trades or averaging up for short trades is a bad strategy.  It can be completely viable if you have positioned size for the scaling in of the positions and still control your risk.  The people telling you that you should not practice averaging down probably have very little knowledge about scaling in and position sizing.

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