Fundamental analysis Macroeconomic indicators Trading on the news Technical indicators

News Trading Reverse

Elena Berseneva 29 june 2022 46 4

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.

Hypothesis
To conclusion

The rate of return of the reverse news trading strategy is positive.

К выводам
Data used

Financial instruments: 28 currency pairs


Timeframe: 1 hour (H1)


Historical data: 01/01/2008 – 01/01/2021


Analyzed events (news):

  1. US Nonfarm Payrolls
  2. Employment Change in Australia
  3. Industrial Sentiment (the Eurozone)
  4. CPI (YoY) (the UK)
  5. Employment Change (Canada)
  6. Employment Change (QoQ) (New Zealand)
  7. CPI (YoY) (Switzerland)
  8. Tokyo Core CPI (YoY)


There are 1,953 market entries in total.


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


The USA
Australia
The Eurozone
The UK
Canada
New Zealand
Switzerland
Japan
EURUSD
EURAUD
EURUSD
EURGBP
USDCAD
NZDUSD
USDCHF
USDJPY
GBPUSD
GBPAUD
EURGBP
GBPUSD
GBPCAD
EURNZD
EURCHF
EURJPY
AUDUSD
AUDUSD
EURCAD
GBPCAD
AUDCAD
NZDJPY
GBPCHF
AUDJPY
USDJPY
AUDJPY
EURJPY
GBPJPY
CADJPY
AUDNZD
AUDCHF
GBPJPY
USDCAD
AUDCAD
EURAUD
GBPAUD
EURCAD
NZDCAD
NZDCHF
CADJP



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. Рcurrent < Рprevious (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. Рcurrent > Рprevious (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)

Conclusion

Reverse news strategy signals are rare. On average, such signals can be observed from two times a year to three times a month, depending on the parameters of the strategy.

A reverse news strategy with the following characteristics has shown a rate of return close to a significant value, namely 0.08%:

  • range of price movement after the news release in relation to the width of the Bollinger bands: Pb = 150%;
  • standard MACD parameters: 12, 26, 9;
  • waiting time for signal formation: H =24 hours;
  • closing a position: 5 or 10 hours after entry.

Otherwise, the rate of return of the reverse strategy does not reach a significant value of 0.1% modulo.


The effectiveness of the reverse news strategy has not been identified.

Detailed results are shown in the Appendix:

XLSX (0.07 MB)News trading reverse.xlsx

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