Let us return to the example of the US unemployment rate. Earlier, we explained what may happen if the data is consistent with expectations or slightly better than expected. Now, let’s assume that the data is unexpectedly declining. What impact will this have on the dollar? One possible scenario for the dollar is a decline. What, right? If the unemployment rate falls, shouldn’t the dollar rise?
There are many reasons to explain why even if more people are employed, the dollar may still fall.
The first reason is that the long-term and general trend of the US economy is still in a downward trend. Remember, there are several fundamental factors that affect the strength of the economy. Despite the drop in the unemployment rate, this is not enough to prompt traders to start changing their overall bearish view of the dollar.
The second reason may be the reason for the decline in the unemployment rate. Possibly, the decline in the unemployment rate happened just after the peak of employment during the Thanksgiving holiday. During this time, many companies usually increase recruitment to cope with the sudden increase in shoppers. The increase in employment may lead to a decline in the unemployment rate in the short term, but this does not change the long-term outlook of the US economy.
A more accurate method to measure unemployment is to compare last year’s data with this year’s. This allows you to see whether the job market has actually improved or not.
The important thing to remember is that before we make a quick trading decision, we always have to look back at the overall economic situation.
Now, you should have this understanding in your mind. Below, we will teach you how to use the news for directional trading.
For simplicity, we will use the unemployment rate as an example. Before the report is released, the first thing you need to do is to look at the trend of the unemployment rate to determine whether the unemployment rate has been rising or falling. Through the previous trend of unemployment rate, you can get a general view of the future trend.
Suppose that the unemployment rate has been rising steadily. Six months ago, the unemployment rate was 1%, and last month, the unemployment rate rose to 3%. You may now say that you are confident that the number of employed persons is continually declining, so the chance of the unemployment rate continuing to rise is very high.
Given that you expect the unemployment rate to rise, now you can start preparing to short the dollar. In particular, you feel you can short USD/JPY.
Just before the unemployment rate report was published, at least 20 minutes ago, you observed the trend of USD/JPY, and you found that the exchange rate was in range fluctuations. Pay attention to the highs and lows of the interval, they will become the breakthrough points.
Note: The smaller the volatility interval, the greater the tendency of the exchange rate to fluctuate.
Since you expect the US dollar to go lower, you will be particularly concerned about the possible downward breakthrough in the USD/JPY. You anticipate that the exchange rate will fall, so your more reasonable strategy is to set the entry point at the level below the first break point.
You may also set your stop loss at the upper breakpoint level and set your profit target level at the same number of points as the breakpoint interval.
This will play a role in your trading, because you have built a bearish dollar trading model, and now, all you need to do is watch your trading complete.
Later, you see that the USD/JPY has reached the target level you set. You have captured a lot of profits! Celebrate it!
The core of conducting a directional transaction is that you must fully understand the information behind the news report you intend to trade. If you can’t understand the impact of the upcoming news report on a particular currency, then the trading model you have built may be bad.