The currency markets often jump violently after the results of the fundamental economic announcement hits the news wires. Suddenly the volatility in the markets increases. The price action smashes through the nearest and weakest levels of support and resistance when the news is released.
When the markets become violent, the price level at some point has jumped too far and too fast and pulls back. It often takes three to five minutes for the price action to reach that level. This price level is very important and this is the end of the news spike in most of the cases when the price action reaches this point and begins to pull back.
Just before the news came out, the currency markets began to wake up anticipating a surprise. Dont forget that currency traders cant know the results of the news before it is released. Most of them are nervous and anticipate violent reaction by the market. Some traders place orders on hunches, rumors and guesses. Mark the price level with a horizontal line on the chart when it begins to pullback after the initial violent reaction.
The chances are that the currency market may move in the wrong direction as the initial reaction to the news. Most often, this last minute volatility is created by traders exiting a trade before the news is released trying to avoid volatility in the markets.
Dont pull the trigger at this point. Preserve the capital. The news is then released suddenly and the market moves dramatically. Dont trade just because you see the market moving in a particular direction 20 seconds before the news was announced. Thousands of market orders are placed just before the release of the news.
There are unique risks like slippage, gapping, spreads and such. Dont pull the trigger yet. However, we now have two pieces of vital information with us now. We know the results of the economic announcement. We now know whether it was good, bad or surprising for the markets.
Let the market move. Stay out. Discipline is important at this point and dont pull the trigger. You may feel like you are missing a great trading opportunity but what you are doing is avoiding taking unnecessary risks. You now know the direction in which the market is moving. You should try to avoid the risk of trading at this point as the market is highly volatile.
The price begins to pull back. You have a better market to trade now. Volatility is still high but not wild, crazy or out of control. Slippage risk drops to zero. The danger of spreads widening is now drastically reduced.
You now know the direction, support and resistance of the market. The price retracements are often where the novices lose money. You have avoided it by waiting for the price to pull back. Now trade in the direction of the market.
You should let the news come out. Let the volatility identify the support and resistance. Let the price pull back. Let the price bounce again and cross the horizontal line that you had drawn. Thats too much waiting and requires good patience on your part.
The main focus should be preservation of your capital and only trade if the chances of winning are high. It will keep you out of bad trades. If the market reacts powerfully to the news, only then trade. Otherwise stay out of the trade.