Predicting the news is one thing….predicting the market reaction is another.

Today we got word that the European Central Bank kept their interest rates unchanged while the Bank of England lowered their interest rates.  Since higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value, FX Power Course students have been asking us why the EUR/GBP sold off when it should have rallied.

The first thing I tell them is that predicting the Central Bank actions are one thing, but predicting the market’s reaction is another.  The rate cut by the Bank of England was no surprise, traders were expecting this.  Also, the lack of change by the European Central Bank was not necessarily a surprise.  However, the accompanying statement did show that the European Central Bank was concerned that their economy might be slowing down.

This was a little different from the stance up until this announcement in that previously their bias was to raise rates to keep inflation in check.  So traders, who typically trade today based on what they think the situation will be like six months in the future heard what they have been suspecting, that the next move by the European Central Bank might be to lower rates instead of raising them.  So traders sold the EUR pairs.  So if you like trading the news, stick to the reaction of the market and not the news itself when making trading decisions.

Start at the top and work your way down.

One of the important points we teach in the funded forex Power Courses is to trade in the direction of the trend on the daily chart.  We recommend only trading the strongest trends as that is where you are likely to find the best trading opportunities.  After having identified a strong trend on the daily chart, we then recommend moving down to an hourly or 4-hour chart to find your entry and exit, but only in the direction of the daily trend.

Too often though, new traders lose their way and start with the short-term charts to find a trade and then move up to the daily chart to justify their choice.  But this approach is not as effective as starting with the daily charts to find the strongest trends.  These new traders want action and seem to be able to squeeze a trade out of the market even if there are few solid opportunities.

This of course lowers the win percentage and profitability of your approach.  We must start with the daily chart first and stick with the most obvious trends.  Then if you move down to the intraday charts of those strongest trending markets and no trades are setting up, you must exercise discipline and patience to stay out of the market and not force a trade.  Being okay with staying out of the market is key to long-term success.  The idea is to trade the strongest setups instead of always being in a trade.  So make sure your goals are prioritized to increase your chance of success and only trade when you have the best chance of winning.

Take a step back to see the big picture.

One issue I see with many new traders is that they use the shortest time frame charts to make their trading decisions.  It is typical to see new traders use a 1-minute or 5-minute chart because they think that their risk is lower.  Since they risk less on each trade, they must be better off.

The problem is that these trades found on these charts usually result in more risk as you can have many losing trades in a row because of the volatility on those charts.  In our FX Power Courses we recommend trading off of the hourly or 4-hour chart in the direction of the trend as seen on the daily chart.

This way you are trading with the momentum of the market and are able to be in on some of the bigger moves that these markets are known for.  Those big spikes on the 5-minute chart are easily explained on the longer-term charts as they usually are within a bigger move.  So start with the daily chart to identify the direction of the trend and then move down to the hourly or 4-hour chart to find your trade.  If the trend is up, then only look for buys and if the trend is down, then only look for sells. This does keep your risk acceptable and the potential profit big enough to cover those losing trades.