This article is based on Eyal Mor’s presentation from the 2017 New York Trader’s Expo. Eyal is the founder and CEO of BetterTrader, an app that helps traders to analyze the impact of economic events in real time and make informed trading decisions.
There are three main factors that combine to make economic events a great time to trade the markets, so long as we are armed with the necessary information and tools for success. The three factors are:
First, economic events cause volatility. Traders love a volatile market, as it presents an opportunity for significant profits when played correctly. A stable market is boring, and hard to profit from. However, unexpected volatility can wreak havoc on even the most experienced trader’s strategy, which brings us to our second factor.
Economic events are pre-scheduled. Unlike a tweet from the president, which can send the market into a frenzy with no warning, events like a quarterly earnings report or a Fed meeting are planned far in advance.
Finally, economic events happen on a recurring basis. This is crucial because it means that we can measure how the market reacted in each situation, and accurately predict a market move in the case of similar events.
Reverse engineer the market logic
With presidential tweets or other unexpected events, we can imagine how we think the market should react, but the market is very unpredictable in these scenarios, and even seemingly good judgment can result in big losses. When trading scheduled economic events with BetterTrader.co, users can see exactly how the market has reacted to similar events in the past, and statistically, analyze how it will move based on the results.
Once we have decided to trade economic events, we need to examine the best way to do so. If the results of an event are stronger than expected, should we take it as a buy signal? Which asset should we trade for each event? Trading is very complicated today. The days of buying and selling assets based on some pattern on the chart are long over. Today, a successful trader must have an edge, and never lose it.
While trading under pressure, it is not enough to rely on memory and emotions. Interpreting and analyzing data in your mind is not a recipe for success in the high-paced world of day trading. We as traders need a system to rely on when there is no time to research and weigh the risks and benefits of every move. It doesn’t matter if you use a paper system or a computerized system, you just need a system that works for you. The system I am presenting here is based on data collection, analysis, and firm decision making, eliminating the errors of human logic.
We start our preparation for an economic event 15 minutes before it begins. There are 2 stages. Stage 1 is gathering the basic data: Previous releases, expected results, range of the official data within the last 3 years, and surprise range; the range of the surprises – actual vs. expected. These are the basics that we use to understand the landscape of information for the instrument we are handling. This gives us a basis of understanding for what we’re getting ourselves into. In Stage 2, we explore the market logic for this specific event using a simulation. We don’t know if the results will be negative, positive, or as expected, but using the simulation, we can determine what the best trading strategy would be for each of the three possibilities. This allows the trader to have a clear idea of how to capitalize on each situation, and trade calmly and efficiently rather than panicking after an unexpected result.
After the event, BetterTrader provides three proprietary tools for an edge in the market.
- How surprising was the result? Were they a bit stronger, stronger, or much stronger than expected?
- We get some perspective based on past results. For example: “this release is the most positive surprise in the past 3 years”.
- Statistically backtested trade ideas. This is where the app will say “9 out of 11 times the SPX500 was on the uptrend in similar situations”.
So what do we have now?
1 – We have a complete understanding of the release and its implications. The numerical difference between actual and expected doesn’t mean anything until you have relative terms attached to it, such as ‘strong’ or ‘weak’. We have context and perspective. The numbers now mean something.
2 – We have an idea of how to trade – including:
- Which asset to buy/sell
- Where to place the stop loss
- What a reasonable profit target is
- The expected amount of volatility
- How long you should hold your position
In conclusion, trading economic events can be risky, but with the proper tools and information, it can be very lucrative. As long as you have sufficient preparation, you can tilt the odds in your favor and take advantage of a fantastic opportunity.
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