How to select the best triggers for trading Forex Live-on-the-News ...

By Dustin Pass, Professional Forex Trader

How to choose the most critical component out of any news release...

When there is more than one component to a set of news releases it can be very difficult to choose which component will provide the most reliable move. Using the UK CPI as a demonstration, let's break it down and figure out how to select the most reliable component to base your triggers on.

Many people focused mainly on the CPI M/M number. Today I opted to use the Core number and would like to breakdown the process in this decision.

The first point to understand is that there are no constants and you must be willing to adapt or modify your strategy. When deciding upon triggers, I generally retrieve the historical data from the past few years. But the main focus is on the last 6 months because it is more consistent with the existing market condition.

Breaking down the UK CPI release…

Once I have this data I begin to analyze the movement that ensues immediately after the data is released and then compare it to the deviations from the different components. We will go back 6 months for this demonstration which will put our starting point at October 17, 2006. The data deviated as follows:

UK CPI Core Y/Y higher by .2
UK CPI M/M as expected
UK CPI Y/Y as expected

This resulted in a move of 40 pips which is substantial considering that only one component came out deviating from what was expected. In the case of the UK CPI data a higher number strengthens the GBP so a rally can be expected as seen below.

Lets look at the next month and see what happens with it. The next example we will see is November 14, 2006 and this time we had variations in all 3 components and the market moved very well with all of them deviating in the same direction. The numbers are as follows:

UK CPI Core Y/Y Lower by .2
UK CPI M/M Lower by .1
UK CPI Y/Y Lower by .2

Looking at the above information we can see that the two that deviated the most are the Core number and the regular CPI. The Monthly figure only deviated by .1. The bias on this trade will be short so we would expect a sell off but the question is how much of a sell off. As seen below the market moved down over 50 pips within about 5 minutes so we have two examples of a substantial market move with the Core CPI being the only common denominator at this point.

To identify which release is really in charge we need some examples of a few different scenarios. We need to see the amount of movement caused when each of the three releases deviates without the others deviating.

Thus far we have only seen the movement of the Core CPI and it has proven to be the common denominator in both of the above examples which moved over 40 pips in each case.

The next month the data came out December 12, 2006 gives us a little more insight on what to look for. This time all the numbers came out deviating but none more than .1. Although this is not a direct comparison one can see that the lower numbers across the board did result in a smaller move. The number are as follows:

UK CPI Core Y/Y Higher by .1
UK CPI M/M Higher by .1
UK CPI Y/Y Higher by .1

With none of the above releases exceeding .2 in deviation a smaller move of less than 30 pips occurs. Although this is not comparable to the last release because of the Y/Y number coming out .2 we can still compare the Core and the monthly number.

In the previous month the Core deviated by .2 and the M/M deviated by .1 resulting in a move over 50 pips. This month the M/M number deviated the same as last month but the Core deviated less than it did last month and the pip movement was diminished over 20 pips.

We still can't say for sure the Core was the reason for this diminished move because the Y/Y number was also lower this month than last month but through deductive reasoning we are getting closer to a decision. The below chart illustrates the diminished move.

The search for the true market mover narrows…

January 16, 2007 gives us some very good information to narrow our search. We get a situation almost opposite the first situation. This month the Core number has the same deviation that it has in the first month however the M/M figure deviates more. The actual figures are below.

UK CPI Core Y/Y Higher by .1
UK CPI M/M Higher by .2
UK CPI Y/Y Higher by .1

In this example the M/M figure is higher than we have seen it in the past so this will give us a great indicator as to the affect this particular number has on the market. If the M/M figure is in fact what the market is reacting to we would expect to see move at least equal to the one caused by the Core deviating by .2 .

When I looked to the charts I was actually quite surprised that the amount of movement was less than we have seen from any of the examples. So the M/M figure deviates more than it has before however the market only moves around 15 pips.

This is definitely a very good indication that the M/M figure is not as important as the Core Y/Y. See the chart below for the unexpected move... A higher than expected number should have resulted in a rally however we only saw a 15 pip spike. It is clear that trading with the M/M number could be somewhat risky.

February 13 2007 doesn’t offer any answers in regards to what our focus should be however it does tell us that .2 is a very strong deviation when see across the board. All the numbers deviated by .2 lower this month and we saw a substantial move down. Over 70 pips on this release.

The only thing we might take from this is again it seems as if the Core Y/Y number seems to be involved with every move that is substantial. The chart from this trade can be see below.

The common denominator becomes apparent…

The next release occurs on March 20, 2007 and gives us some solid answers. The one variable that I have not been able to nail down has been the regular Y/Y number. We finally get some answers when we see these figures:

UK CPI Core Y/Y As expected
UK CPI M/M Higher by .1
UK CPI Y/Y Higher by .1

In the above numbers we see that the Core number comes out as expected so any movement will be a direct result of the Y/Y and the M/M.

If we find that the market doesn’t move much this would definitely support the thought that the M/M is not as important as the Core. Minimal movement would also give us some insight on the Y/Y figure which we haven’t really been able to identify with yet.

As you can see from the chart below the move was almost non existent. We see a small slow move less than 5 pips before the market turns and goes the other way.

From the above analysis I see that the common denominator in all the examples that provided safe market moves was the Core Y/Y figure. In addition all the moves that did not provide a safe entry lacked deviation from the Core Y/Y. Take that information along with the fact that we have seen the M/M figure deviating by .2 and not exceeding a 30 point move that gives me much more confidence in trading the Core.

After going through the last 6 months my conclusion is as follows:

• The CPI Core Y/Y number is currently the main factor when trading the CPI out of the UK...

• The M/M figure would next biggest affect followed by the year...

If the Core doesn’t deviate significantly that does not mean the market won't move substantially as there are always additional factors involved.

For example if the Y/Y number and the M/M number deviated substantially (.2 or more) and the Core deviated slightly than this could potentially result in a very good move Case and point, today April 17, 2007 the numbers were as follows:

UK CPI Core Y/Y Higher by .1
UK CPI M/M Higher by .2
UK CPI Y/Y Higher by .3

As you can see from the numbers above we have substantial deviation and collectively this was a surprise to the market and resulted in a huge move. Another factor that played a very important role in this was the 2.000 level on the GBP which hadn’t been struck for 15 years.

We were about 70 pips from this level pre-release and there were a lot of orders being held at 2.000 and the news provided a good excuse for the banks to run up to those orders.

See below the image of today’s move.

Dustin Pass
Professional Trader
and Forex Funds Manager
Forex Live on the News / Forex Master Maker

For more information, visit http://www.tradingliveonthenews.com