Anybody that has been trading the markets for a period of time is familiar with the kind of price action that eventuates as a result of a big announcement, an outlier print or an important central bank decision that changes the equilibrium of market participants beliefs. Especially, in expectation of a planned announcement that can have serious market implications: volume disappears, realised S/T volatility drops like a stone and trading ranges contract. The result is that when the announcement does happen there is an abrupt, violent move, more usually than not in the wrong direction (call it a head fake). This initial move often fools (even experienced) traders to either close existing positions or to open fresh ones before whipsawing them and reversing course, usually with double the force and speed of the initial (fake) move. Personally, I rarely participate in what we call “event trading” for the aforementioned reasons* but I do follow them and pay close attention to them because they are of incredible value to my post event trading.

Events as the one I describe above often leave behind big range, heavy volume daily candles and at least half the times of the reversal variety. Those are daily candles I can easily “work with”, especially when they bode well with preexisting technical formations. In essence, these are the kind of candlesticks that provide very strong market pivots. The highs or lows can be used to define risk (stops can be placed accordingly) and those are the trades that offer extremely compelling Risk/Reward ratios. As an example, lets examine Kiwi’s Friday price action before and after Yellen’s speech. Kiwi had started the day very strong, threatening a break of the resistance zone (and ascending wedge) it had been testing and failing to break multiple times during the past few weeks. Immediately after the bullet points of Yellen’s speech got published, $ strengthened (kiwi fell), but soon after, unexpectedly the $ dumped (speculation is that it had to do with the more dovish L/T natural rate projections in her speech) and kiwi briefly broke above the resistance zone and the ascending wedge (ending diagonal). After the market had taken out stops and most probably committed several individuals to fresh long positions, $ started being strongly and steadily bid once again! The conclusion was a false break, big range, key reversal, daily candlestick with a close below the ascending wedge support! If that is not THE textbook example of a technical reversal, I honestly don’t know what is.

Does that mean that being short is like having money in the bank? NO, it does NOT. What it means, is that being short with a S/L above the highs, is a trade I would take every single time I found it. The R/R is great and the chance of success from my market experience is at least 50%. If I believe that something has at least 50% chance of happening and the R/R is higher than 1:1, not taking the trade is in a sense a violation of mathematics of trading.

* The occasions that “force” me into event trading are the ones in which I strongly believe that the market is vastly underestimating or overestimating the possibility of anything outside the consensus happening (take Brexit as a recent example). IF I believe that something has a 20% chance of happening and the market is pricing in a 5% possibility I feel obliged to buy it. Anyhow, I will not go into detailed analysis since this is out of topic and gives me a great opportunity to write another blog post.

Steve Voulgaridis

Notice on the above daily chart:

  1. False break higher from resistance zone.
  2. Key reversal, big range daily candlestick.
  3. Obvious RSI divergence.
  4. Break & Daily / Weekly close below the ascending wedge.
  5. Serious support levels (consider them as good target candidates): 0.7110, 0.6970, 0.6890