Do news results matter ? Divergence First, then Results!

There is a large confusion about news results and trading them.

Having large orders ready to go seconds after news hit. Can be very profitable.

but never step in the trap that the news results do actually matter in this moment!!

There are a few things you should know and consider about news.

The higher the impact, the more the considerations below become a reality.

Divergence first!

On major (but regular) events, like NFP, the first thing to happen is the divergence between currencies play out. This is because a very large number of trades are beein closed at this moment. and things get back to its natural order.

As example, if the usdollar is very high on strength but the canadian dollar is very low.

You can expect a drop in USDCAD first. Regardless of the news result!

Of course at a later time, Fundamentals will be “priced in” … meaning the price will turn the way the news reflect.

But before that happens, the markets will react to the trade activity itself, which is completely unrelated to the news.

Here is some examples why this is the case.

Lets assume the majority of the institutions are holding Buy positions.

Closing a Buy Position means technically you Sell the same size back to the market, and that means that suddenly a lot of sell positions being offered. (That includes “tight stops”) stop orders are also pending orders, if there are many orders at a certain price range, that will generate supply for this certain price, and demand will follow, meaning the price will drop.

If now a large group of traders do this, price will move faster.

Now we add the divergence component.

Both sell and buy orders are offered at a massive amount, at the same time.

Then the strength of the underlying asset eg. the dollar or the euro or anything the symbol has its base on will move against the Strength, this can be seen on Divergence charts. Like this one from xscalp.com

The USDollar more less neutral (Red line), but the Euro high up (Green Line). For the Normalisation to happen we can expect the Euro to Drop first, regardless of the news result.

Here is the first reaction on EURUSD

Clear and fast drop to a technical support point comes first.

Sure later the news comes into play which leads the USDollar to fall, and EURUSD going up as a result of the news.

EUR – Green / USD – Red

Knowing this is a great opportunity, as the news result itself play a different role.

Please not that the smaller the impact, the lesser the divergence comes into effect, as example, positive Australian housing news will “just” have a impact on the market positively without any of the divergence effects.

 

divergence data and correlations can be seen in Realtime at xscalp.com