International trade is another announcement that I like to trade. I like it because it has growth and economic strength implications for the U.S., and it is a very important metric for trade-centric economies, like that of Japan. In fact, I generally concentrate on the USD/JPY pair when this announcement is due since the reaction can be quite dramatic. It is possible to trade other currencies that are trade dependent for economic health, but I prefer the USD/JPY because of its liquidity.
To understand how this trade works, it is important to understand the implications of trade balance. When an economy such as that of the U.S. is importing more from exporting currencies, those goods must ultimately be paid for in the local currency. In the example I am using here, that means Japanese goods must be paid for in Japanese yen. If the U.S. is doing the importing, then U.S. dollars must be sold to purchase Japanese yen. This shifts the supply and demand balance toward a stronger Japanese yen and a weaker U.S. dollar. In this case, that means that the USD/JPY exchange rate would decline in value. Conversely, if the U.S. trade deficit narrows, that means demand for Japanese yen could be declining and its value should drop relative to the U.S. dollar. If that is the case, the USD/JPY exchange rate will rise toward a weaker Japanese yen.
Like most U.S.-based economic announcements, trade is released an hour before the equity markets open at 8:30 a.m. eastern. Like the labor announcement, I need to set up my trade just prior to the announcement. I like to see the market in a tight range or channel. I have pulled a trade example from August 10, 2006. As you can see in the chart below, although the pair was declining in the hours prior to the announcement, the range was pretty tight without a lot of volatility whipping the market back and forth. This looks like a good setup and you can see the spike in the market after the announcement that the deficit was tightening occurred.
Source: Prophet.net
The fact that I setup my trade as a long position just prior to the announcement was determined by the trend in the daily chart. The market had basically been in an uptrend since May, and the most recent days during the week before also had a bullish bias. This is not an exact science, but it helps immensely to put the odds in your favor by using the tools you have at your disposal. You can also see from the daily chart of the USD/JPY that its daily range was fairly tight. This means that my target is a little smaller than it was on the EUR/USD in the previous example.
Source: Prophet.net
In this case I used a 50-pip limit, or profit target, against a 15-pip stop loss. This still maintains a nice risk-to-reward ratio while allowing enough room for the market to shake out a little if needed.
As you can imagine, it is not uncommon to be wrong more times than you are right with any trading technique. It is therefore necessary to make sure that it is possible to be more right when you are right than wrong when you are wrong. I know many traders who talk about systems that are right 80 percent or more of the time, but the one time they are wrong, they wind up wiping out yearsï' worth of profits. If you ask me, I think it is healthier for my portfolio and my stress levels to take trades that have more balance between what I have at risk versus what I stand to gain if I am a winner.
To understand how this trade works, it is important to understand the implications of trade balance. When an economy such as that of the U.S. is importing more from exporting currencies, those goods must ultimately be paid for in the local currency. In the example I am using here, that means Japanese goods must be paid for in Japanese yen. If the U.S. is doing the importing, then U.S. dollars must be sold to purchase Japanese yen. This shifts the supply and demand balance toward a stronger Japanese yen and a weaker U.S. dollar. In this case, that means that the USD/JPY exchange rate would decline in value. Conversely, if the U.S. trade deficit narrows, that means demand for Japanese yen could be declining and its value should drop relative to the U.S. dollar. If that is the case, the USD/JPY exchange rate will rise toward a weaker Japanese yen.
Like most U.S.-based economic announcements, trade is released an hour before the equity markets open at 8:30 a.m. eastern. Like the labor announcement, I need to set up my trade just prior to the announcement. I like to see the market in a tight range or channel. I have pulled a trade example from August 10, 2006. As you can see in the chart below, although the pair was declining in the hours prior to the announcement, the range was pretty tight without a lot of volatility whipping the market back and forth. This looks like a good setup and you can see the spike in the market after the announcement that the deficit was tightening occurred.
Source: Prophet.net
The fact that I setup my trade as a long position just prior to the announcement was determined by the trend in the daily chart. The market had basically been in an uptrend since May, and the most recent days during the week before also had a bullish bias. This is not an exact science, but it helps immensely to put the odds in your favor by using the tools you have at your disposal. You can also see from the daily chart of the USD/JPY that its daily range was fairly tight. This means that my target is a little smaller than it was on the EUR/USD in the previous example.
Source: Prophet.net
In this case I used a 50-pip limit, or profit target, against a 15-pip stop loss. This still maintains a nice risk-to-reward ratio while allowing enough room for the market to shake out a little if needed.
As you can imagine, it is not uncommon to be wrong more times than you are right with any trading technique. It is therefore necessary to make sure that it is possible to be more right when you are right than wrong when you are wrong. I know many traders who talk about systems that are right 80 percent or more of the time, but the one time they are wrong, they wind up wiping out yearsï' worth of profits. If you ask me, I think it is healthier for my portfolio and my stress levels to take trades that have more balance between what I have at risk versus what I stand to gain if I am a winner.
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