Today for the first time I traded a CPI day. Properly.
If you've read some of my other posts you may have come across one where I was sat in a pub in London, and disastrously tried to trade a CPI release on my mobile long after it had been announced (Post - So I guess I'm still a noob). That lead to me turning a profitable week into a losing week. After that day I vowed to never do some of things that I did, ever again. So today when I decided to trade a CPI day I had a plan...
Now if you're not familiar with CPI and the releases, the statement below is taken directly from the US Bureau of Labor Statistics web site -
**The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.**
Apparently pre global recession, the monthly release of CPI data didn't really have much effect on the markets although I have not researched this for myself. But now as the world is deep in recession, the release of this data has a considerable effect on world market prices, DOW/ NASDAQ/ DAX/ FTSE. We are talking 100's of points on the more volatile ones. So this is obviously quite a big event for day traders because if you are on the right side of the move and trading one of the more volatile markets, you can be in for a bumper payday.
With this in mind I decided upon a plan. Now maybe I could've done it differently and taken the approach of find out what announcements had gone before, judge the state of the US economy at the time and attempt to correlate this with the price movement, or I could've looked at the charts in the days leading up to the announcement to see if there were any discernible patterns which would identify if the news was likely to be Bullish or Bearish. Or, I could do what I did.
I knew that trying to actually place a trade as the seconds clicked over and the 13:30 (GMT - 08:30 Eastern) candle opened, because it moves so fast you are unlikely to get a fill. So what could be a reasonable way around this? Again, a stop order is no good due to the volatility. This leaves only one real option.
To already be in the market, with an open, active trade, before 13:30. Okay that's not a problem but how to decide bullish or bearish? What about being both? I'm referring to 'hedging'. The act of having multiple opposing trades open at the same time, one as a seller and one as a buyer. Okay that's reasonable but now this presents a whole raft of new problems. What about respective stops? Where do you place them? How big will they need to be? What time do you open these trades in relation to the all important 13:30?
So what I did was to firstly find out the dates of all the CPI releases this year (ForexFactory/ calendar - if you don't know of this it is an invaluable resource to all traders). Then go back over the DOW, DAX and NASDAQ charts, for the year, focussing on the dates and the 5 minute chart and plot the following - 13:30 candle opening price and how many points it moved in that first 5 minutes/ the high and low of the previous candle (13:25)/ if there was any tail on the 13:30 candle and if so, how big (in points)/ calculate a stop size sufficient to take in all of this data, and then apply an average across the preceding 11 months.
This would give me an outline of how many points I essentially needed to risk on each trade to have the chance of catching the initial move. Now look at how much the 13:25 candle moved in the last 2 minutes so I could buy at market and then add my stop from that entry point. I didn't to get in too early as there was no point. I wanted to enter as close to 13:30 as I could.
So I had my plan. Over the course of a couple of evenings I gathered all the data on all three markets and reached my conclusions. Of the 11 releases, only 2 days for the DOW and NASDAQ required realistic stops of over a 100 points! Yeah that's what I thought to. The other days fell between a range of 15 to 50. For the DAX the single highest day was 35, the rest being 10 - 20 with 3 requiring 30 point stops. So I had my range. To air on the side of caution as the last thing I wanted to do was get whipsawed and stopped out of both trades (this would've happened in July and October as the 13:25 candle was the one that moved 100+ points in the opposite direction to the market pre announcement!) so I added a cushion to the averages. This left me with DAX - 40 point stop loss each way (hedging), NASDAQ - 45 points each way and DOW - 75 (although I felt 100 was probably better) points. My plan was coming together. I had completed my research, and had my stops. Now to decide which market to trade?
Ideally I wanted to trade the DOW as it presented the biggest rewards (volatility) of the three by a long way. The last three releases had seen the 13:30 candle record points of 734/ 740/ 686 (ish), but it came with the biggest sacrifice of points. I say sacrifice because obviously the market can only move one way at a time. So with hedging, one of my trades was going to win and the other would lose. So I would be sacrificing 100 points. Although I was comfortable with this I then thought, 'What if I could place trades on multiple markets?' It was possible in the last minute to do this surely? So taking this into account and the fact that for the 'sacrifice' of one trades points, I could effectively trade two markets, I decided I would trade the DAX and the NASDAQ. Between them the approximate points on the last 3 announcements had been 174/ 282/ 300 for DAX and 374/ 415/ 357 NASDAQ. I was looking at potentially an average combined of 634 points for the both. Sacrificing 85 points in stops. That's not bad by anyones standards. So the scene was set. Only one final problem standing in the way of myself and glory. I start work at 13:00 and have promised myself that I will never trade on my mobile ever again (CPI disaster day). So I called them up and told them I would be late and not in until roughly 14:00 as I was expecting an important delivery. The plan was complete.....
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