News Trading Reverse

Sometimes, watching the currency pair chart after the release of macroeconomic statistics, you can notice the price movement, first in the direction of the news, and then in the opposite direction.

That is, for example, after the growth of the Nonfarm Payrolls indicator, the USDJPY currency pair first grows and then decreases.

Such dynamics can also be seen when updating other economic indicators.

Therefore, today we will consider news trading as a field for short-term speculation and examine whether fixing quick profits after the release of the news really causes a reverse movement.

The currency pairs have been taken for the study by country:

Reverse news strategy

An hour before the publication of the news, we fix the width of the Bollinger Bands (BB).

After publication, we monitor the price for a certain time.

If during this period the price has gone to a distance of at least 100% of the starting width of the Bollinger Bands, we start looking for MACD divergence.

As soon as we get a formed divergence, we open a position opposite to the news movement.

Event detection method

1. Р_current < Р_previous (The current value of the indicator that affects the base currency of the currency pair is less than the previous one. The current value of the indicator that affects the quoted currency of the currency pair is greater than the previous one)

2. Open1 – Low(i) >= Pb * [BB _up (0) – ВВ _down (0)] / 100

where i = 1, 2, …, 24, …,36.

3. When conditions 1 and 2 are met, we look for divergence:

MACD[a] < MACD[a-1] и MACD[a] < MACD[a+1];

MACD[b] < MACD[b-1] и MACD[b] < MACD[b+1];

MACD[b] > MACD[a];

Low(B) < Low(A)

4. When conditions 1, 2 and 3 are met, we buy on the Open of the next candlestick after the formed MACD divergence.

1. Р_current > Р_previous (The current value of the indicator that affects the base currency of the currency pair is greater than the previous one. The current value of the indicator that affects the quoted currency of the currency pair is less than the previous one)

2. High(i) – Open1 >= Pb * [BB _up (0) – ВВ _down (0)] / 100

where i = 1, 2, …, 24.

3. When conditions 1 and 2 are met, we look for divergence:

MACD[a] > MACD[a-1] и MACD[a] > MACD[a+1];

MACD[b] > MACD[b-1] и MACD[b] > MACD[b+1];

MACD[a] > MACD[b];

High(A) < High(B)

4. When conditions 1, 2 and 3 are met, we sell on the Open of the next candlestick after the formed MACD divergence.

We will test the reverse news strategy in twelve of its combinations, namely by adjusting the conditional parameters:

• range of price movement (Pb);
• MACD indicator to search for divergences;
• signal waiting time (H).

Percent_BB (Pb) – the range of price movement after the release of the news in relation to the width of the Bollinger bands an hour before the release of the news, in %.

Pb = [Open1 – Low(i)] / [BB _up (0) – ВВ _down (0)] * 100 - for buying

Pb = [High(i) – Open1] / [BB _up(0) – ВВ _down (0)] * 100 - for selling

The greater Pb, the stronger the market reacts to the news, and the greater the price movement in the direction of the news.

We will consider the following values: Pb = 100%; 150%; 200%.

MACD is an indicator for divergence searching. The author's parameters of the indicator (12.26.9) and those recommended by Bollinger (21.100.9) have been taken for analysis. In the second case, the indicator lines are smoother, which theoretically reduces the number of emerging divergences.

Hours (H) – the time during which we wait for the formation of the signal (hours of observation). The smaller H, the faster the market unfolds in the opposite direction to the news movement, and a divergence is formed.

Closing a position

1, 2, 3, 4, 5, 10 hours after entering the market

Analysis of the obtained results

We will evaluate the results according to the following criteria:

• The rate of return reflects the relative change in the quotations of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, negative - about the loss. 

The rate of return (R) of a financial instrument is calculated using the formula:

where:

n is the number of transactions;

P (%) – the increment percentage of a financial instrument quote, at the time of fixing the position, is calculated as follows:

for buy positions

P (%) = (position closing price - position opening price) / position opening price * 100%

for sell positions

P (%) = (position opening price - position closing price) / position opening price * 100%

The results are presented in diagrams:

MACD (12,26,9)

MACD (21,100,9)

Detailed results are shown in the Appendix:

XLSX (0.07 MB)News trading reverse.xlsx