Every year when preparing for the annual ChartPattern.com stock trading conference, I have a chance to look back on which trades worked best over the past year and what trends are emerging for the year ahead. Designed for serious traders, the conference gives attendees the opportunity to hear first-hand what I am seeing in markets, see my latest strategies and techniques as well as discover which ones have worked best. Many attendees are subscribers of The Zanger Report newsletter but the conference is open to all technical traders who are serious about making money in stocks and networking with successful traders.

This exercise gives me the luxury of looking at markets from 30,000 feet. And every year it provides some very useful ideas and insights that will help you refine and hone your trading skills whether you’re a day trader or a longer-term swing trader.

So what are the most important trading lessons we can take away from this exercise? Here are some of the factors required to become successful. This list is by no means complete but it’s a great place to start!

Know your chart patterns.

A stock chart can speak volumes to those who know how to interpret what they are saying. I’ve written about this before but it’s worth discussing again in greater detail.

Charts represent the sum total of what those invested in the stock are thinking, feeling and doing. But like any language, learning it can’t be done in a week or a month – it takes years of study. If you’re still reading this, congratulations! Your chances of succeeding in this business are zero if hard work scares you. And don’t worry the ChartPattern.com member’s website and chatrooms are great places to get lots of help and input but more about that later.

Stocks are my buddies so it’s important I fully understand how they are feeling and acting. One big mistake many market participants make is to rely primarily on corporate and economic fundamentals. Fundamentals have their place, but don’t expect them to help you get in and out of trades. Why? By the time you realize earnings and revenues are rising for example, you’ve usually missed the most powerful part of the move. And by the time you rely on fundamentals to get you out ahead of a major correction like we saw in 2007, you’re toast.

One of the most powerful chart patterns is the Head & Shoulders. It can warn of a stock getting ready to drop, as is the case with the Head & Shoulders or Head & Shoulders top pattern (Figure 1) or at market bottoms, in the case of the Inverted Head & Shoulders pattern (Figures 2 & 3). These patterns are better known as reversal patterns but they can also be continuation patterns to show you when the primary trend is getting ready to resume. The Inverted H&S can appear at a major low but it can also be a continuation pattern. We see two good examples of this pattern in the process of forming in Figures 2 & 3.

Figure 1 – Daily chart showing an example of a bearish Head & Shoulders forming on the Standard & Poors Depository Receipt ETF (SPY) in 2006-7 that signaled the top in the market before the financial crisis hit full force. Chart by ChartPattern.com

Gold is a place where investors run when they are uncertain about the safety of paper money. As Figure 2 of the SPYDR Gold Trust exchange traded fund (GLD) shows, the price peaked in September 2011 and then dropped heavily. The Inverted H&S shows investors selling into October until a new group of buyers stepped in. But then selling resumed which drove GLD to a lower low in early January 2012 before the buyers took over again. Notice that the next flurry of selling in February and March was too weak to push gold to the January low as the stock put in a higher high before the buyers stepped in en masse again.

Looking at the pattern from a distance, we can see the major battle between bears and bulls. We can see how the mood slowly but surely shifts from bearish to bullish over the span of the pattern.

Figure 2 – Daily chart from The Zanger Report daily newsletter of the SPDR Gold Trust ETF (GLD) showing the inverted Head & Shoulder pattern and accompanying volume. Chart by ChartPattern.com

Volume is a valuable tool to help confirm chart patterns and it provides another perspective on the action. Notice that the big spikes in August 2011 as the battle raged at the peak before the bears won out. There is another spike when the left shoulder formed in late September and then volume dropped again as selling pressure lessened and the bears gave up. The next spike at the head in late December and early January shows another battle raging between bears and bulls that the bulls eventually won. Another, lower spike occurred around the bottom of the right shoulder.

The next battle comes as price rallies to complete the right shoulder at the neckline around $174 when the bears will again try to sell GLD down. If the pattern is to be successful, buyers will have to step in and volume will again spike around the neckline. Aggressive traders who recognize the pattern as it’s forming will often step in early to buy after the bottom of the right shoulder has been put in but this can be risky as stocks have a nasty habit of dropping here. Trying to anticipate each move while the pattern is incomplete is very difficult indeed.  That’s why it’s essential to have tight stops. A good exit point to use is the blue trendline in Figure 2 from the bottom of the head through the bottom of the right shoulder (see blue trendline in Figure 1). If the stock drops below this line, best to exit and wait for a better setup.

We see another example of the Inverted H&S pattern in the iShares Silver Trust ETF (SLV) in Figure 3. The fact that both gold and silver are “acting” similarly and flashing the same pattern is bullish as that shows that both metals are experiencing similar investor sentiment and behavior in their search for safety.

Figure 3 – Daily chart from the Zanger Report daily showing another Inverted Head & Shoulders pattern on SLV. Chart by ChartPattern.com

Figure 4 shows another chart pattern demonstrating bullishness in the Financial Bull 3 X ETF (FAS), and that has positive implications for financial stocks. Because every 1 point move in financials translates to a 3 point move in FAS, it is much more reactive. As the chart shows, a triple bottom (dotted purple horizontal line) formed between August and December 2011. You can also see the volume spikes showing the shift in sentiment as the bears lost out and bulls started to dominate.

You can also see the bull flag pattern between $82 and $92 which represented the second buy point for ChartPattern chatroom members and readers of The Zanger Report newsletter. Flag and pennants are bullish continuation patterns that appear frequently on our market leading stocks, especially during powerful rallies.

Figure 3 – Daily chart of FAS from The Zanger Report daily showing the triple bottom chart pattern that marked the bottom in the stock and was followed by a powerful rally. Chart by ChartPattern.com

A word of caution – trading double and triple times ETFs like FAS significantly increases risk so should only be done by those with lots of experience who can afford to lose if the trade goes against you. Tight stops and quick reflexes to changing conditions are essential to staying out of trouble.

Inverted Head & Shoulders and Triple Bottoms are just two examples of a wide variety of powerful chart patterns that traders need to learn to recognize in a millisecond on all time frames. In some ways, stock traders are like combat pilots who spend months learning to identify aircraft in a split second. When a pilot sees another aircraft at a distance, it’s essential that he or she know in an instant if its friend or foe since their life depends on it.

I spent every spare moment looking at thousands of charts in books and on the computer until I could pick out patterns in my sleep. This skill was essential in helping me parlay $11,000 into $18 million in 18 months during the Internet boom and has allowed me to continue to be successful today.

Every trader should ask themselves these three questions;

1) How important is trading success to me?

2) What am I doing now to give myself the best chances of making it?

3) Am I prepared to spend every spare hour in my spare time learning to recognize chart patterns?

Learning to recognize patterns isn’t all you’ll need to succeed but it’s a critical ingredient.

Be sure to check out the chart pattern reference in the Education Section of ChartPattern.com at  http://chartpattern.com/understanding_chart_patterns.html

Learn the Power of Cycles

We’ve all heard of cycles. They range from the very long like the 50-60 year Kondratieff Cycle to short intraday cycles that can last as little as a few minutes. There are decennial or 10-year cycles which demonstrate similarities between years with the same number. But one of the most discussed in the financial media, especially given the proximity to an election, is the Presidential Cycle.

For example, 2012 is both a decennial cycle “2” year and year 4 of the Presidential Cycle exerting the effect on the Dow shown in Figure 4. Put them together and we see that the Dow has historically experienced major lows mid-year after which it rallied into year-end. Since the S&P500 was up 12% in Q1 and given that years in which Q1 SPX performance exceeded 9% have ended up 86% of the time according to the CBOE’s Russell Rhoads, bodes well for stocks for the rest of 2012.

But history doesn’t always repeat itself and as Figure 4 shows, the first quarter of 2012 did not perform as predicted by the election and decennial cycles. Instead of being down, the Dow was up by more than 7% by the end of Q1.  And therein lies the challenge with many well-known cycles – sometimes they work and sometimes they don’t.

However, there are other powerful but intricate daily, weekly and monthly cycles that are not well-known. The key is to find the cycles that work best in the stock you are trading for your preferred time in trade whether it’s hourly, daily or weekly.  These cycles that provide advance alerts about when a stock is getting ready to generate a buy signal or warn that the move is about to end, are discussed regularly in our chatrooms.

Those interested in learning more are invited to try a two-week trial membership which includes The Zanger Report newsletter and access to our members only chatrooms where you can join in on our discussion of what is working best in trading our market leading stocks which includes the cycles working best on the stocks being discussed.

Figure 4 – Charts showing long-term cycles going back 81 years for the Presidential Cycle (top chart) and 10-year seasonal cycle for years ending in “2”. The trick with cycles is first determining how well stocks are adhering to them this time around and then assigning a probability to each going forward.

Join the Right Trading Team

Trading is a tough business and it can also be a lonely one. My advice to anyone starting out, especially for those who have been struggling to make money is to find a mentor.  Find someone with the technical trading experience from whom you can learn what you need to succeed. It should be someone who’s learned the business, is successful themselves and has the record to prove it. There are a lot of wannabes out there advertising their newsletters, chatrooms and services but how many have the audited stock-trading record to back it up? What sort of stock trading history can they show you? How many documented winners have they had year-to-date?

A great way to do this is to become part of a group that shares trading ideas, strategies and discusses entry and exit points during the trading day. Thanks to the Internet, it is now possible to do this, share charts and news as well as resources via an interactive chatroom. Finding tradable opportunities is a lot easier when working together as a group with someone with the experience and know-how to lead the way.

As a member of our ChartPattern.com chatrooms, you’ll start your trading day with a discussion of important events as earnings reports, economic releases, Federal Reserve announcements and market moving news. We also discuss the important technical factors influencing stocks such as buy points, what chart patterns are forming and key levels of support and resistance.

Discuss set ups on your favorite stocks with the group in the chatroom, many of whom have years of trading experience led by yours truly. We help you avoid making expensive mistakes such as letting your emotions get in the way so that you can stay on track and focus on what works best.

As a member of Chartpattern.com you’ll also have an opportunity to attend our annual conferences where I speak to members for a full day, share what stocks have made the most money, and which ones have the best potential for gain in the future. Each year I share which chart patterns have been most powerful and what patterns I’m watching and where I see the market heading in the next year.

You’ll also have an opportunity to network with other traders at the conference over lunch or during the break. Then there are those famous get-togethers over dinner or at the bar afterwards. It’s a great way to share trading ideas and strategies and make new friends in the trading world.

Do you have the right stuff to succeed in the trading business? If you are serious about trading as a business, join us at ChartPattern.com. See how The Zanger Report and ChartPattern.com chatroom can work for you. We offer a free no obligation two-week trial for new members. Go to http://chartpattern.com/cf/registration_form.cfm for more information. See you there!

About the author

Daniel J. Zanger holds the unofficial stock trading record for the largest percentage change for a personal portfolio with an audited annual return of more than 29,000%, a feat achieved by parlaying $10,775 into $18 million. A former pool contractor, the world first learned of his trading acumen in an article that appeared in Fortune Magazine in December 2000 entitled My Stocks Are Up 10,000%!” He uses indicators sparingly, relying primarily on chart patterns and volume to trade. As well as being featured in such publications as Barron’s Magazine, Forbes, Fortune, Active Trader, Trader Monthly and Traders World he has written articles for such publications as Technical Analysis of Stocks & Commodities magazine, Traders Magazine (Europe) and SFO magazine. Dan in the host of ChartPattern.com and writes The Zanger Report newsletter four times a week. 

Predicting markets is like predicting the weather, only short-term forecasts are viable. Short-term trading has the advantages of generally lower risk but unfortunately, the profits are limited. The real money is in longer-term trends but the risks are too high, especially since they are so hard to predict. So what’s a trader to do when faced with this dilemma? Simple, it’s not a mutually exclusive decision. Why not trade for both short-term and longer-term gains?

Considering the above, Dave will show you his hybrid approach to trading. He’ll show you how to recognize trends and some simple patterns to get aboard them.
It takes more than just a couple of patterns to be successful. You also need a money management plan and the mindset to follow it. Therefore, Dave will touch upon a basic but robust money management system that will help you to capture both short-term and longer-term moves.

Finally, since the only thing that might be standing between you and your success is yourself, he’ll touch upon the 3 M’s of Trader’s Psychology: Method, Money Management, and Mind.

Obviously, there’s a lot more to trading than can be explained in an hour. However, at the least, attendees should be able walk away with a good grasp of Dave’s approach to the markets and whether or not it is right for you.

For those who don’t know Dave, his bio can be found here:
http://www.davelandry.com/bio.htm

His latest book, the Layman’s Guide To Trading Stocks is available through Amazon:
http://tinyurl.com/6x5jrbw
He can be reached at dave@davelandry.com

Pro forex trader Andrei Knight will discuss the 4 essentials of successful trading – how to be on the correct side of the trade, how to identify targets, where to place your stop, and how to calculate how to calculate the optimal position size. Mr. Knight is the founder of fxKnight.com, which provides active traders with a forum, live chat room, training videos, and real-time news feeds, and is also a regular contributor to TradersLog, FXStreet, DailyFX, and the International Business Times, where he also sits on the advisory board.

Kevin “Huddy” Hudson is a full-time trader and coach to fellow traders specializing in the S&P E-mini futures contract. He has spent many years perfecting his entry and exit techniques using channels and trend lines along with critical Market Profile levels to find and trade both minor and major support areas. He has made a living trading the markets for more than a decade. As the founder of Channel-Trading.com, Huddy loves to pass along his thoughts about the market and trade ideas to subscribers and students. Nothing makes him happier than seeing a student actually “get it”.

In this webinar we will cover the basics of market profile, and our proprietary “ProMax” Profile tool, along with the proper use of the Delta Volume Study to pinpoint entry and exit areas in the market of your choosing. Huddy will weave in his thoughts about the proper trading discipline and mindset throughout the presentation. Stay tuned for an opportunity to join Huddy and his team for an interatctive Q and A in his virtual classroom.

Thinking about trading futures but don’t know where to begin? Are you looking for help making the transition? In this session Tim Racette of EminiMind.com goes over the most important aspects of futures trading and help you build a foundation for your trading in the futures markets.

One of the oldest (and most outdated) trading maxims is: “Don’t Try to Catch a Falling Knife” The idea is that when a market is dropping hard and fast it is better to wait before attempting to buy it; the metaphor conjures images of a very messy outcome doing a lot of needless damage to a trader physically-if not to his equity. In my experience-the reason most analysts and educators suggest to YOU the developing trader “don’t try to catch a falling knife” is simply because they personally don’t know how to do it.

Short-term opportunities abound in this volatile market, particularly in indexes and sectors. Technical strategist, Mike Paulenoff, shares how he uses pattern recognition, oscillators, and market psychology overlaid with macroeconomic analysis to identify short-term opportunities in gold, oil, the dollar, the emini S&P and other indices and asset classes via their ETFs and leading component stocks. He will show how his strategy has resulted in 60% winning trades over the last five years.

Bio: Michael Paulenoff is a technical strategist and author of MPTrader.com a real-time diary of his index and sector analysis and trade alerts. He is a 33-year Wall Street veteran, formerly with Smith Barney, Harris Upham, Drexel Burnham Lambert, and Republic National Bank. Co-author of The Business-One Irwin Guide to the Futures Markets (with Stanley Kroll), Mike is widely followed on sites such as MarketWatch, Wall Street Journal Online, and Minyanville, where he is a contributing professor.

Traders love military metaphors: they keep copies of “Art of War” on their bookshelves and talk about attacking the market. And, they need to keep some powder dry.

You can’t trade if you don’t have money. Margin will only get you so far; you have to have some cash in your account before the broker will extend you credit. Money management is the process of determining how much of your account you should place on each trade, and it can make or break you as a trader. The better you manage your account, the more profits you can gain from your winning trades. You will be able to keep powder dry so that you can charge forward another day.

Risk, Return, and Ruin

Obviously, you trade in order to make money. Still, every trader has losing trades, bad streaks, and negative returns. The down periods can be long and miserable, too, but you can survive them. The trick is to have more winners than losers. If one loser wipes out all your capital, though, you won’t be around for the next winner.

Traders take risk in order to get a return. Different traders have different preferences for risk. The market, meanwhile, is relentless. It cares nothing for your risk preferences, it just does what it does. Some days, that’s great. But other days, that’s not. A long series of losing trades can ruin any trader That’s why a key starting point has to be finding your probability of ruin. How likely is your account to be annihilated?

The first number you need to find is your advantage, which is the percentage of winning trades over losing trades you are likely to have. It should be more than 50%, but it may not be a lot more. You can get this from your trading diary or your back-testing data. If you find that 55% of your trades are winners and 45% of your traders are losers, then your advantage is 55% – 45% 10%. Using this number (call it A) and the number of trades you can make in a day (which you can call C), you can find your probability of ruin:

If your advantage is 10% and you can make 20 trades in a day, then your probability of ruin is

In other words, on any given day, you have a 1.8% change of losing all the money that you trade that day. If you trade all of your money, then that day will bust you. You can reduce your risk of ruin by finding a strategy that gives you a greater advantage or by making more trades, if those are feasible for you.

Calculating the risk of ruin is your first step. The higher your number, the more money management matters to your success.

Sizing Up Your Trades

There are several different systems used for money management, and your choice and how you apply it will be as much art as science. Each system starts with a mathematical calculation that you can work out on your own or through the money management tools found in most day trading software packages. And each will put limits on how much money you commit to a trade in order to limit the damage done by your losers.

Money management only works if you stick to it, and some traders are reluctant to do that because they think that it will keep them from making good money on the best trades. Why not throw all the funds you have at a sure thing? Well, because if the sure thing turns out to be a pathetic loser, you’ve lost it all. Moreover, if you have all of your money committed to one trade, then you have no funds to place on the next trade, which might be even better. Money management helps ensure that you have funds to place on good trades by limiting the dollar hit of losses on bad trades.

Three of the easier systems to use are fixed fractional and martingale. They are hardly the only systems out there, but the other systems that traders use are usually variations of these.

Under the fixed fractional system, you first determine how much of your account you want to risk on each trade. This will depend in part on how many trades you can make at once with your strategy, and it should be 10 percent or less in most cases. You need two more numbers: the dollar value of your account and the dollars you could lose on a given trade. Suppose you have an account with $50,000 in equity and you trade stock using stop loss orders to keep your risk of loss on any share of stock to $5. (Trade risk has to be a positive dollar value, so if you think of percentage loss, convert it to dollars for any given trade to do the calculation.) If you have decided to trade only 8 percent of your account, the number of 100-share orders you should trade can be found with this equation:

If you plug in the account data,

you get an answer of 800. In other words, if you limit your losses to $5 per share, you can trade up to 800 shares at a time. Worst case, you may lose $4000, but you will still have $46,000 available for the next trade.

Under fixed fractional, the second trade would be adjusted for the results of the first. If you now have $46,000 in your account, you can trade 736 shares (which would probably have to be rounded down to 700). If you made $4000, though, your account equity would be $54,000, giving you a trade size of 864 shares. That would most likely have to be rounded down to 800, but over time, you’d be able to increase your position size.

The martingale system was developed centuries ago for casino gambling, and it is popular with many traders. You start with a trading dollar limit, so if you have a $50,000 account and want to limit your first trade to 8 percent, then your trade limit is $4000. You open the day with a $4000 trade. If it pays off, then enter your second trade at $4000. If it does not work, then place a second trade for twice the amount – $8000. If the $8000 trade works, your next trade goes back to $4000. If it does not, then double it again – to $16,000. Martingale has one major drawback – you can run out of money if you have a series of losers, which is possible when the financial markets are under stress and rising or falling rapidly. In ordinary trading conditions, though, it can work quite well.

The fixed fractional system is one of several that limit the percentage of money that you can commit to any one trade. Any of these will keep you from running out of money, which is especially important in volatile markets. Of course, this is a mathematical formula; your account equity could become so small that you cannot meet a minimum trade size. Martingale can increase your return over time, if your account size is large enough, your initial trade is relatively small, and the returns are normal.

Thinking Beyond Your Trading Account

If your account size declines enough, then you are out of the trading game. It happens; even people with day jobs face layoffs and firings. That’s why there’s a third component of money management that goes beyond risk calculations and trade size: pulling funds out of your trading account. Come up with a schedule for withdrawing a percentage of your equity and moving it to an investment account: a tax-advantaged retirement account, a long-only mutual fund, even bank CDs. If your day trading is your occupation, determine a regular salary amount and transfer that to your checking account.

If you aren’t trading in order to make money, then take up World of Warcraft instead. It will be a lot safer!

The enemies of the trader are doubt, fear, and greed. Money management can defeat them. If you know your risk of ruin, you can conquer fear. If you have a set system for sizing your trades, you can reduce your doubt. And if you build assets outside of your trading account, you won’t need to be greedy in your trades.

Like war, trading is as much about mentality as it is about tactics. Your armor is money management.

Fuelband follows up from Nike’s popular collaboration with Apple (AAPL) on the NIKE + iPod sports kit that enables users to track runs while listening to music and to analyze the data on the Nike+ website. With over 5 million users, the Nike+ online community allows you to track activities, set goals, receive coaching tips, share and compete with friends.

Fuelband is a wristband with a built in accelerometer that tracks your activity and digitizes the data into NikeFuel. Each day you can set goals for activity and the level of Fuel you want to achieve.  A built in USB connects to your computer and syncing with your mobile device is done via wireless Bluetooth using the wristband’s only button. Progress can be tracked either on the iPhone app or Nike website.

Nike, Inc. President & CEO Mark Parker said at the launch event in New York; “The NIKE+ FuelBand is a way for Nike to further evolve the exciting possibilities of merging the physical and digital worlds”.

Nike, ranked by interbrand as the 25th most influential brand in the world in 2011 has dramatically outperformed the market, the stock price doubling over the past 5 years compared with the anemic growth of the S&P 500. Nike also pays dividend yield of 1.35%.

With a $48 billion market cap, Nike is the world’s largest sports company, dwarfing closest rival Adidas.

Getting close to the users data means Nike can follow them, build community online and make a closer relationship than ever before. The initiative reflects the shift of marketing efforts towards the digital realm.

Fuelband rivals include  Jawbone UP and Fitbit.

One of the most popular ways to trade forex is to trade economic data and news releases.  Most people may have heard of the saying News Moves Markets.  In the forex market this is particularly true because currencies are essentially confidence indicators for countries.  Since forex is traded on a leveraged basis, the impact of news is magnified, making a small reaction turn into a large one.  News releases provide fresh information on how an economy is performing and if the data surprise is large enough, the market’s reaction can last for a few minutes, hours and sometimes even days.  Trading news through currencies can be exciting but also risky due to the volatility that can be triggered by the news event. Many forex traders love to trade news because of the potentially big reactions, but these same swings is what can also make news trading difficult.

Not all news releases are created equal.  The key to trading news is knowing which releases matter and which don’t.  For example, there is no point in positioning ahead of U.S. wholesale inventories report because this piece of data is not a game changer for the U.S. economy and almost never affects the U.S. dollar.  The non-farm payrolls report on the other hand is a very big market mover because the degree of job growth directly affects consumer spending which is key to the viability of any economy.  However the non-farm payrolls report is also traditionally the most market-moving piece of economic data for the U.S. dollar and the foreign exchange market in general.  For this reason, it is better to avoid trading NFPs due to the volatility. The employment reports of other countries on the other hand are fair game.  Many traders, particularly new ones will scratch their heads and wonder if they will be able to tell how impactful a particular news release will be. This comes with extensive experience but thankfully there are many experts out there who have do the work for you every day. A number of forex websites provide global economic calendars and rate the impact of each news events as High, Medium or Low.  Generally speaking, the 3 most potentially market moving releases for currencies are the central bank’s rate decision, the employment report and retail sales.

The following chart shows how USD/CAD reacted to the Canadian employment report which was released at 7:00 AM ET.  Job growth that month was surprisingly weak with employment growing by only 2.3k compared to a 21.7k rise the prior month.  The Canadian dollar fell immediately after the release, driving USD/CAD sharply higher the moment the data came out.  An hour later, USD/CAD was trading 30 pips higher.  If not for the U.S. non-farm payrolls release at 8:30 AM ET, USD/CAD would have probably extended its rise further.

Source: eSignal

Economic releases can be traded either proactively or reactively.  Trading proactively involves taking an educated guess on whether a piece of data will surprise to the upside or downside and placing the trade before the number is released. This is not as mind boggling as it first sounds and a Masters Degree in Economics is certainly not needed but oftentimes traders find it too challenging and opt to trade reactively, which involves placing a trade after the economic data is released.  This removes the need to “guess” the economic data but can also remove any initially advantageous knee-jerk reactions.

When trading news proactively, I generally like to place my trade 20 minutes before the data is released.  I find 20 minutes the sweet spot because it is close enough to the data release that the market is usually quietly anticipating the report.  It is also far away enough from the release time that spreads usually remain stable.  The key to trading news reactively on the other hand is to wait 5 minutes after the number is released before taking the trade.  This is extremely important because first we want to make sure the market cares about the number.  Second, we want to make sure that the reaction is logical, meaning that a good number is followed by a rally in the currency and a soft number is followed by a sell-off.  You always want to avoid trades where the number is good and the currency pair sells off because something else could be going on. In other words, either the market doesn’t care about the release or there could be underlying weakness that is not immediately evident to new traders.  We also don’t want to see the reaction reverse in the first 5 minutes because that also suggests that the data surprise was not material enough for the currency to hold its gains.  When a data surprise is significant, the initial move will oftentimes see continuation, as in the USD/CAD chart above. The continuation may not be long, but it could be meaningful enough to generate some short profits. However, news trading is not the same as swing trading because it aims to trade an initial burst of activity rather than a long trend. This makes it important to be nimble with profits and tight with stops.  For news trading, I am typically satisfied with a 25 to 30 pip move depending on the currency pair and news release.

In Chart #2, which is the same USD/CAD chart shown above entry points for proactive and reactive trading.  In both cases, the trade would have been profitable but profits are never guaranteed particularly when trading news, which is why using stops is very important.  In the case of USD/CAD, had we been greedier and decided to ride the trade through the non-farm payrolls report, it would have been a disaster.

Source: eSignal

Here are some tips to predicting economic data for anyone interested in proactive trading.

Employment Report

Tip:  To Forecast Employment, Look at Employment Component of PMI Reports

The degree of job growth or lack thereof is very important to a country’s economic outlook.  If the labor market is doing well and jobs are plentiful, it is usually synonymous with a strong and improving economy.  If companies are laying off workers in size, then there is a good chance that the economy is weakening.  Forecasting the potential surprise in the labor market is not as difficult as it may seem.  Nearly every major country releases purchasing managers’ reports (PMI) for the service, manufacturing and construction sectors prior to the official employment report.  In the U.S., it is called the ISM report.  Within each of these reports is a subcomponent titled as employment.  If the employment component of the 3 reports increased from the previous month, then there is also a good chance that the number of jobs created rose as well.  However if the 3 reports show that the labor market has deteriorated, then there is a good chance that the official labor market report will show the same deterioration.  A good jobs number is typically positive for the currency while a weak number will usually cause the currency to sell off.  This information can usually be found through a simple Google news search using a clever combination of words.

Retail Sales 

Tip: To Forecast Retail Sales, Look at Confidence and Sales Component of PMI Services

The degree of consumer spending is just as important as the amount of job growth because it measures the contribution that consumers are making to the economy.  If consumers are spending and retail sales are strong, then there is a good chance the economy is growing which is positive for the currency.  If it is weak, then it is a cause for concern which usually translates into weakness for the currency.  Forecasting the potential improvement or deterioration of retail sales is also not as difficult as one would expect.  In Australia for example, most months, the performance of services index is released before retail sales and within the PSI report, there is a subcomponent titled sales.  The PSI report is released by the Australian Industry Group which is an independent not for profit association and their results have a reasonably good correlation with the government’s figures.

Consumer Prices

Tip: Look at Producer Prices

A country’s consumer price report is also a tradable news release because keeping prices stable is a part of the mandate for many central banks.  In fact, for the European Central Bank and the Bank of England, it is their top priority. Thankfully forecasting CPI is not as difficult as it seems.  Producer prices, which measures inflation on a wholesale level is typically reported before consumer prices.  If PPI accelerates quickly, there is a good chance that CPI will rise as well as producers pass their costs to consumers.  If PPI falls, CPI has a good chance of declining.

Forecasting economic data is not easy but a Masters in Economics is not needed either – just some common sense.  Try it for yourself, and if you still find it challenging, there is always reactive trading.