GMTAuthor: Giles Coghlan

11

How to navigate a path through an upcoming risk event


A risk event is any market event that the market is anticipating. For example, this could be an anticipated rate statement, a speech from a central banker, or a long awaited trade deal announcement like Brexit or Nafta. There are two key ways to trade risk events and that is by trading into them and/or out of them. 




Trading into a risk event 

The first aspect to be aware of in trading risk events is to be aware of the calendar of events that is coming up for the next week. These are widely available and most brokers have their own calendar you can access. Every Friday each risk event for the coming week will have the expected readings published so you can know what the market is expecting for the up coming release. These expected readings are compiled from the opinions of experts as to what they are expecting from the up coming releases. Your next job is to interpret the expected upcoming data in line with the market context or central banks outlook. For example, consider the following hypothetical situation. If you have the jobs number coming out for Australia in the next week and it is expected to be a higher reading than previously and you also know that the Reserve Bank of Australia has stated that their focus is on an increasing jobs number in order to be sure of an interest rate rise, then you can be confident that the market will be buying AUD into that data announcement. The reason the market would be buying AUD into the risk event would be because it is expected to be a positive reading. The positive reading would confirm the RBA's criteria for raising interest rates and the AUD would be bid on these expectations alone. 

To take these kind of trade you need the expected positive figure to agree with the general positive outlook of the currency, as in the example above. You want to ensure there is a match with the 

expected reading that is in line with the general outlook for the currency. e.g. trade positively expected readings with positive outlooks for a country. You can also do the vice versa. So, in order to effectively trade into a risk event look at what the central bank is focusing on and the underlying fundamentals. Once you have this information you are ready to start considering trading into risk events. 

A final step in preparation 

Now that you think you have a risk event to trade you can start to read other analyst and financial commentators to get a feel for what the market is thinking. Try to read from a few different sources to get a good feel about what the market is thinking about the upcoming risk event and the different scenarios that may occur from the data release. You will now have a really good feel for the market anticipation of the event you have chosen. 

Entry 

Now simply enter the market at a logical place where you can define and limit your risk. The actual entry price is not the most important thing. However, you need to enter the market before the actual risk event is released and you want to make sure that your risk is sensible. 

Exit 

You can now exit the trade before the announcement or move your stop loss and try to play for more out of the risk event. 

Trading out of a risk event 

The way to trade out of a risk event is where there is a substantial deviation from what the market was expecting. A good example of this was found on the 17th of August on the USD/CAD chart when there was a significant deviation for Canada's CPI reading. It was expected to be 2.5% y/y and instead it was released as 3.0% y/y. This was a significant surprise for the markets, and at the time increased the probability of a Bank of Canada rate hike in their September meeting. Now that you have your surprise deviation you are in a good position to trade. You could have entered short on a retrace of the spike down. 


A similar way of trading out of a risk event is when the market is heavily expecting one outcome, but that outcome changes. A recent example of this can be seen below when the US was widely expected to impose tariffs on $200 bln worth of Chines imports into the US. The market was expecting these tariffs to take effect, but then there was a surprise announcement that the US would start negotiating with China again. The market responded very quickly and went from a risk off bias to a risk on bias instantly. AUD/JPY gained very quickly on the announcement as a good proxy for 'risk on' trading. For savvy traders who are tuned into the sentiment and , quite literally, into the news could have profited from the resulting move. These kind of statements that are squawked really need to be responded to within the first few minutes to be profitable for a trader on a very short term basis 



The key aspect of trading into and out of risk events is having a good grasp of what the market is expecting from a certain event. By aligning yourself with the market expectations you are going to have a decent grasp of future direction. A key aspect of executing these strategies is having a good technical grasp of how to limit your losses, while offering yourself decent gains.


ForexLive

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