Impending Events May Require Trade Plan Adjustments

By Kathleen Brooks, Brian Dolan

As you develop your trading plan, look ahead to see what data and events are scheduled during the expected life of the trade. If you follow that simple advice, you strongly reduce the chances of having your trade strategy upset by largely predictable events. More important, you’ll be able to anticipate likely catalysts for price shifts, which will give you greater insight into subsequent price movements. Forewarned is forearmed.

If you’ve entered into a trade strategy based on an upcoming event — an expected weak U.S. data report, for instance — and the market has cooperated and priced in a lower U.S. dollar before the report is released, you may be looking at a profitable position before the data is even released. As the release time draws near, you may consider taking some profit off the table and holding on to the remaining partial position.

Consider the possible outcomes. If the data comes in negative for the U.S. dollar, and the market reacts by selling the U.S. dollar, you’re still in the partial position to gain from further dollar weakness. But what if the data comes in stronger than expected?

Or what if the data comes in weak as expected, but the market takes profit on short-dollar positions made in advance, in a “sell-the-rumor/buy-the-fact” reaction? You’ve protected your profit and taken some money out of the market before the event ever transpired. Now, that’s called playing the market!

In the preceding scenario, we intentionally depict a short trade to remind you that being short is as common as being long in currency trading. You may be more familiar with “Buy the rumor, sell the fact.” Make sure you know that it works both ways.

Before major data and events, the market also frequently goes into a sideways holding pattern. The event speculators have all put on their positions, and the rest of the market is waiting for the data to decide how to react.

These holding patterns can develop hours or days in advance, depending on what event is coming. Especially if you’re trading from a short-term perspective, be prepared for these doldrums and consider whether riding through them is worthwhile.