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Fundamental analysis Trading on the news

A News Trading Strategy: Is the Way to Increase the Deposit Open?

Елена Берсенева 25 march 2022 118 3

A news trading strategy is one of the most popular strategies used among traders. The strategy implies the possibility to capitalize on trading deals opened based on the analysis of the published indicators of the macroeconomic statistics which cause changes in quotes of financial instruments.

 

A decision on a buy or a sell of the financial instrument is taken after the economic data release. To open trading deals, financial instruments are selected connected with the economy of a country against which new reporting data are published.

 

News can be divided into the two categories:

  • Unexpected. Such as natural disasters, terrorist attacks, military conflicts, etc. This news is often unfavorable and contribute to a sharp price crash.
  • Periodic. This news is on regular basis released. They include economic indicators, company revenue reports, and similar data.

 

Periodic macroeconomic events will be viewed under our study.

 

A trader relies on an economic calendar working with the news. The study is based on the MarketCheese economic calendar.

 

The basic principal is a search for an event that has a strong impact on a particular market.

 

Events in economic calendars are usually graded according to the degree of importance.

 

The more significant the event is, the higher volatility can be expected after the release.

 

It is important to monitor the news in advance to be aware of possible price fluctuations and what financial instruments are involved.

 

In this case, it is possible to make decisions in advance and place pending orders with the opening of long or short positions.

 

At the moment of news release, the following event options are possible:

 

1) The comparison of the current values of the published indicators to the previous ones

  • Overlap of the current data to the previous data;
  • Current data are better than the previous data;
  • Current data are worse than the previous data.

 

2) The comparison of the current values of the published indicators to the projective ones:

  • Overlap with the projection;
  • Situation is better than the projection;
  • Current situation is worse than the projected situation.

 

The current indicators will be compared with the previous ones under our study.

 

The crucial events which are followed by market players:

  • decisions by the central bank on the monetary policy;
  • data release on GDP growth rates;
  • inflation indicators, in particular the consumer price index;
  • data on business indices;
  • employment and unemployment indicators.

 

These are not all the data that can influence quotes fluctuations of financial instruments. But these are basic data. Trading on these data can be very profitable.

 

For example, in 2007, John Paulson, the head of the Paulson&Co fund, earned $3.2 billion on the fall of the US mortgage system.

Hypothesis
To conclusion

Positive changes in the newly published economic indicator compared with the value for the past period forms a trading signal for growth of the quote of the financial instrument. Negative changes in the indicator, in turn, generate a signal to the quote decline.


A market entry within 2 hours since the appearance of a such trading signal and a market exit during 8 hours after the entry is profitable.

To conclusion

Trading strategy:

 

- enter the market after the event release (news) on the 15-minute candlesticks according to a probable reaction of the instrument for the event (refer to the Appendix for greater detail):

  • 0 (the 0th candlestick, the moment of event publication),
  • 15 minutes (the 1st candlestick),
  • 1 hour (the 4th candlestick),
  • 2 hours (the 8th candlestick),


- leave the market with a candlestick close from the list below after the entry:

  • 1 hour (the 4th candlestick),
  • 2 hours (the 8th candlestick),
  • 3 hours (the 12th candlestick),
  • 4 hours (the 16th candlestick),
  • 5 hours (the 20th candlestick),
  • 8 hours (the 32 nd  candlestick).

 

There are 24 combinations in total of entries/exits. Also, the best/worst entry/exit for every event will be determined.

Data used

The US and Australian economic indicators from the

MarketCheese calendar


Timeframe: 15 minutes (М15)


Historical data: 01.01.2015 – 30.09.2020


USA: 53 events including 8 crucial ones (the detailed list is shown in the Appendix)


Australia: 22 events including 7 crucial ones (the detailed list is shown in the Appendix)


As for financial instruments, 5 USD currency pairs and 5 AUD currency pairs are taken:

  • EURUSD
  • GBPUSD
  • USDCAD
  • USDJPY
  • AUDUSD


  • EURAUD
  • AUDUSD
  • AUDCAD
  • AUDJPY
  • GBPAUD


Total: 20 879 market entries.

Having determined all the conditions and set the necessary parameters, let’s start testing.



Analysis of the Results

 

We will assess the results with the following criterion:

 

  • Rate of return reflects the relative change in quotes of financial instruments, in %. A positive value of the rate of return indicates profitability of the handled signals; a negative value indicates a loss.  


The rate of return (D) of a financial instrument is calculated with the following formula:

 

D = Σ P(%) / n,

 

where:


n is the deal number;


P (%) is a percentage increment of the quote of a financial instrument with the fixating a position calculated with the following way:


For buy positions

P (%) = (price of closing a position – price of opening a position) / price of opening a position * 100%


For sell positions

P (%) = (price of opening a position – price of closing a position)/ the price of opening a position * 100%

 


Let’s take the notations for a combination of market entry and exit with the candlestick number:


Exit Entry
0
1
4
8
4
0-4
1-4
4-4
8-4
8
0-8
1-8
4-8
8-8
12
0-12
1-12
4-12
8-12
16
0-16
1-16
4-16
8-16
20
0-20
1-20
4-20
8-20
32
0-32
1-32
4-32
8-32



The Results are shown in the following diagrams:

We will see which events and entry-exit combinations show the significant rate of return close to 0.1 % and higher:


USA Event
Best Entry-Exit
Rate of return of the best Entry-Exit
Number of events
U.S. Average Weekly Hours
0--8
0.111
155
Participation Rate
0--8
0.107
230
Housing Starts MoM
0--32
0.097
320
Housing Starts
4--32
0.097
315


Australia Event
Best Entry-Exit
Rate of return of the best Entry-Exit
Number of events
Australia Trimmed Mean Consumer Price Index (CPI) YoY
0--20
0.358
55
Australia Consumer Price Index (CPI) YoY
0--20
0.287
85
Australia Trimmed Mean Consumer Price Index (CPI) QoQ
0--32
0.231
65
Australia Interest Rate Decision
0--8
0.217
35
Australia Unemployment Rate
0--32
0.214
225
Australia Consumer Price Index (CPI) QoQ
0--12
0.189
85
Australia Gross Domestic Product (GDP) QoQ
0--32
0.135
105


These events should be taken into consideration.

 


Let’s see which events and entry-exit combinations show the significant rate of return close to – 0.1 % and lower:


USA Event
Worst Entry -Exit
Rate of return of the worst Entry - Exit
Number of events
U.S. Core PCE Price Index YoY
1--16
-0.113
180
ISM Manufacturing Prices
1--32
-0.096
285


Australia Event
Worst Entry -Exit
Rate of return of the worst Entry - Exit
Number of events
Australia Interest Rate Decision
8--32
-0.660
35
National Australia Bank Quarterly Business Confidence
0--32
-0.112
85


These events should be also taken into consideration but aiming at working in the opposite direction.

 


Let’s make the following conclusion.

 

USA Events

 

The highest rate of return of 0.012 % of the trading strategy based on the US event release is noted by the entry at the moment of the event release and the exit in 4, 5, or 8 hours after the release.

 

For the US crucial events, the highest rate of return of 0.009 % is noted with the entry-exit combination of 0—16; the lowest rate of return of -0.011 % is with the entry-exit combination of 1--20.

 

In general, the profitability is not high and does not reach minimum significant value of 0.1% modulo.

 


Australia Events

 

The highest rate of return of 0.067 % of the trading strategy based on the Australian event release is noted with the entry at the moment of the event release and exit in 2 hours after the release.

 

The lowest rate of return of -0.017 % of the trading strategy based on the Australian event release is noted with the entry in 2 hours after the events release and exit in 5 hours after the entry.

 

For the crucial events in Australia, the highest rate of return of 0.087 % is noted with the entry-exit combination of 0—8; the lowest rate of return of -0.072 % is with the entry-exit combination of 8--32.

 

And again, the rate of return does not reach the value of 0.1 % modulo.

 

However, the market entry right away after the release of the important Australian events and the exit in 2 hours after the entry has shown the rate of return of 0.087% which is close to the minimum significant value of 0.1% modulo.

 



A news trading strategy with the market entry during 2 hours after the release and market exit during 8 hours after the entry is appropriate to the following events in the USA and Australia:


1)   USA

  • U.S. Average Weekly Hours (entry -- exit: 0--8);
  • Participation Rate (entry -- exit: 0--8);
  • Housing Starts (м/м) (entry -- exit: 0--32);
  • Housing Starts (entry -- exit: 4--32);
  • U.S. Core PCE Price Index YoY (work in the opposite direction, entry -- exit: 1--16);
  • ISM Manufacturing Prices (work in the opposite direction, entry -- exit: 1--32).

 

2)    Australia:

  • Australia Trimmed Mean Consumer Price Index (CPI) YoY (entry -- exit: 0--20);
  • Australia Consumer Price Index (CPI) YoY (entry -- exit: 0--20);
  • Australia Trimmed Mean Consumer Price Index (CPI) QoQ (entry -- exit: 0--32);
  • Australia Interest Rate Decision (entry -- exit: 0--8);
  • Australia Unemployment Rate (entry -- exit: 0--32);
  • Australia Consumer Price Index (CPI) QoQ (entry -- exit: 0--12);
  • Australia Gross Domestic Product (GDP) QoQ (entry -- exit: 0--32);
  • Australia Interest Rate Decision (work in the opposite direction, entry - -exit: 8--32);
  • National Australia Bank Quarterly Business Confidence (work in the opposite direction, entry ‑- exit: 0--32).
Conclusion

The effectiveness of a news trading strategy with the market entry within 2 hours after the release and with the market exit within 8 hours after the entry for the USA and Australia events has been identified.

Detailed results are shown in the Appendix:

XLSX (0.09 MB)Applicationa to the article 'Trading on news – is the path to deposit growth open'.xlsx

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