What are the key factors to consider operations during central bank data?
Operating during the release of data relating to central banks is one of the most difficult practices we have in the panorama of intraday trading due to various factors that we will go into in this article. This type of operation which falls under day trading requires a very high degree of expertise, very high professionalism and therefore a very high level of experience in terms of intraday operations and daily analysis activities.
In this article we will see what are the factors that most affect this type of operation, mainly highlighting the dangers deriving from this type of practice which, we repeat, requires a very high degree of experience.
Macro and technical analysis before data
Trading during the release of central bank data is one of the most complex activities there is, therefore the first thing we need to have under control, or at least under observation, is the dynamics of the markets during the release of this data .
The data relating to central banks mainly concern interest rates and the associated press conferences, moments in which markets express their maximum and where traders can exploit their skills on the market. In these contexts we must keep in mind, even before possible market movements, the basic macroeconomic situation, which is fundamental in establishing the choices that the trader will make when faced with a substantially very dynamic market.
The trader, before facing the market and the release of the data, must have carried out a macroeconomic analysis activity which will include the possible scenarios which include the expectations regarding the actions of the central banks. To take a very current example, a trader who has interest rate hike expectations from the Federal Reserve will need to take into account an appreciating US dollar against other currencies and contextualize this factor within the market in which he will trade, both it the currency, commodity or stock market.
In essence, the macro analysis mainly consists in understanding how the central bank will move and consequently it will move on to the next step which is that of the technical type analysis where it will identify levels on which the market could react. In these cases we are talking about a real all-round analysis activity, necessary for carrying out a profitable trading activity.
Let’s assume that a trader expects a rate hike by the ECB, first of all, the appreciating EurUsd exchange rate will have to be taken into consideration, at least in theory. Subsequently, the trader will carry out a technical analysis where he will check whether there are conditions for a rise in the euro, and then hypothesize the levels from which the market could go up, or the levels from which the market could start a decline, levels to be used therefore as a target for a bullish movement (in this case).
But this is only the analysis activity, let’s now see what happens next.
The danger of volatility
Notoriously, when we are faced with a market waiting for this data, we usually have a increase in volatility. In practice, when the data of our interest comes out, the market will tend to increase its fluctuations, in the sense that it will be possible to observe a market where the basic fluctuations will be wider, mainly due to a initial decrease in liquidity due precisely to the output of the data.
Let’s take an example where we take the ECB interest rate data release as a reference. In this case, the rate data is released at 14:15, therefore we could expect an increase in volatility at this time. Next is the ECB press conference, which takes place 30 minutes after the data is out, so the trader will expect a further increase in volatility.
In this context the trader has already identified the levels on which to operate and hypothesized scenarios that he will use in his favor for trading.
Volatility is a danger to the trader only when a lack of liquidity is associated with it. This can be observed on the trading book, a tool necessary for entering orders and where the trader can see the bid-ask prices that he can hit depending on whether he wants to buy or sell. Under normal conditions, the bid-ask spread, ie the difference between the purchase price and the sale price, is relatively small compared to the spread close to the release of the interest rate data.
If, for example, on the exchange rate EurUsd, in normal conditions, we have a bid-ask spread of 0.3 pips, close to the data this spread can even go beyond 10 pips , to then normalize only a few minutes after the release of the data. This element is strongly taken into consideration by traders as it is precisely on the price that we will act and on potential volatility.
Risk management
In this context of high volatility and high risk it requires the trader to adjust his risk management, an activity which usually takes place before the data is released when analyzing the market. Adjusting the risk in these cases is absolutely essential as the possibility of running into an error is greater in a highly volatile and at times illiquid market.
Usually the risk adjustment is aimed at reducing it, whether it is reduced by 30/40/50%, this is based on the type of analysis that the trader has done, but above all on how he moves the market.
In essence, operating on data is very difficult and requires experience, experience mainly made up of errors, especially when calculating risk. We remind you that risk management is one of the keys to the success of a trader’s operations, therefore poor risk management close to this data could be absolutely fatal for the trader.
In these contexts prudence is a must, i.e. if the market does not follow what was forecast in the analysis it is better to abandon trading at that moment, if the analysis is in line with what is happening it will be necessary to adjust the risk in the most prudent way possible.
Original article published on Money.it Italy 2023-05-05 13:23:35. Original title: Come fare trading sui dati delle banche centrali
