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Trading Forex In a Runaway Market Due to News Events

Trading Forex In a Runaway Market Due to News Events

2014-09-19 19:00:00
Tyler Yell, CMT, Currency Strategist

Talking Points:

  • What Causes a Runaway Market
  • Identifying a Runaway Market on the Charts
  • Indicators to help you exit in an Orderly Fashion

“Buy the Rumor, Sell the News”

-Trading Lore

Markets can experience many types of emotions. These emotions can easily be seen on the chart using price action that moves higher, lower, or sideways. When markets move in one direction too far too fast however, that can lead to excited traders without a plan for exiting, which is dangerous.

Learn Forex: Stages of a Runaway Market

Trading Forex In a Runaway Market Due to News Events

Presented by FXCM’s Marketscope Charts

What Causes a Runaway Market?

At the risk of oversimplification, forex markets trade on available information about the economies backing the currencies. When no new information is present that would change anyone’s view, the markets tend to move sideways. Therefore, if there is no news the markets tend to be range bound between easily identifiable levels of support and resistance.

When new information comes into the market, the nature of the market news can cause a sharp move. Depending on the nature of the news, the moves can be sharp and many times before the news prints, if a credible rumor comes alive that many believe, the markets move higher / lower aggressively in anticipation.

Learn Forex: Anticipated News Can Move Markets More Aggressively Than News Itself

Trading Forex In a Runaway Market Due to News Events

Presented by FXCM’s Marketscope Charts

Identifying a Runaway Market on the Charts

There are a few ways to identify a runaway market in the FX Market so you can find the one that works for you. You can also use the same methodology to find when the runaway market is slowing down or potentially reversing. The methods that are commonly looked to identify runaway markets on the charts are oscillators, like the Relative Strength Index or RSI, a sharp angled trendline or the very valuable Heikin-Ashi modified Candle.

RSI Behaves Differently In Strong Trends

Trading Forex In a Runaway Market Due to News Events

Image Courtesy of: How to Use RSI in Extended Markets To Time Entries

When a market becomes extended, the RSI will show an “overbought” reading for an extended period of time. RSI being overbought is not a sell signal until the overbought range is broken and even then should be watched carefully. Strong trends can have weak retracements before resuming in the direction of the overall trend.

Indicators to help you exit in an Orderly Fashion

Trading Forex In a Runaway Market Due to News Events

Presented by FXCM’s Marketscope Charts

You can benefit from recognizing the early signs of a reversal so that you can step aside from a good trade when the probability of a profit taking move is underway.

As shown above, markets that chase price higher or lower will often show similar characteristics via momentum. For example, RSI can get compressed in the upper range of 70-100 in an uptrend or the lower range of 30-0 in a downtrend. You can use simple trendlines on RSI to see when a break is occurring or look for RSI divergence to help you see when you should tighten your stops or potentially take profits.

Now that you're armed with a method of identifying when a momentum burst fades, feel free to try this information out on a FREE Forex Demo Account with access to multiple markets.

Closing Thoughts

When new information gets pumped into markets, traders get excited and new potential values based on the rumors can cause traders to buy or sell emphatically. When you find yourself in this situation, you should enter your trades carefully and manage your risk even more carefully.

Traders love new possibilities as any IPO on the New York Stock Exchange can help you to see and because of the potential, reason goes out the window. You can use this to see when the momentum in favor of the runaway trend extends in which case you can stay in the trade or when the momentum begins to breakdown so that you can safely step aside.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@dailyfx.com

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Tyler is available on Twitter @ForexYell

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