Trading Economic News Releases With Divergences!

In this post, I will discuss how I use my divergence trading system for trading economic news releases like the NFP Report. If you haven’t read my post where I explain my divergence trading system for H1 timeframe, you should do it before you continue reading below. Indicators only tell what the market is thinking at the moment. Eugene Fama a finance professor at the University of Chicago School of Business introduced the Efficient Market Hypothesis (EMH) in the 1960s. According to the Efficient Market Hypothesis all publicly available information is immediately compounded into the price. So if there is news of a good quarterly earnings by a company, stock price of that company will immediately start reflecting it by going up. In the same manner, if there is news of bad management in a company, it will also get reflected in the stock price of that company. The stock price will take a plunge depending on the severity of the news.

Currency market is highly efficient. All the publicly available information about a particular currency gets reflected immediately into the price of that currency. Cyprus Bailout, good bad whatever Euro price will reflect the mood of the market immediately. If the market thinks the bailout to be good, Euro will appreciate in value and if the market thinks that the bailout is bad, Euro will depreciate in value. Now this is how the economic news get reflected in the price of a currency. Let’s take the example of NFP report. Before the release of the NFP report, expectations develop in the market whether the report will be positive or negative. Dollar will appreciate or depreciate in value according to market expectations. When the report is released, if there is a difference between the expected and the actual report, market will adjust the price accordingly in the next few hours. So this is why sometimes you see wild reaction by the market when the NFP report is released. This is because what the market had been expecting was very different from what the actual report was. In the same manner, sometimes there is very little reaction by the market on the NFP report release as the market expectation was almost the same as what the actual report released was. So after having understood how market works on expectations, we should be able to spot the divergence pattern when an important economic report like the NFP Report is released. Take a look at the following screenshot!

Trading NFP Report

This EUR/USD screenshot was taken around the time of the NFP Report release on February 8th 2013. As you can see from the above screenshot, all the three indicators MACD, Stochastic and the RSI are showing strong bearish divergence. If you had traded this bearish divergence pattern on H1 according to the system described in my previous post, you could have made more than 150 pips in just a matter of 2 hours. This month, NFP Report day was April 5th. But on 4th rumors started in the market that the report is not positive. As a result a very strong bullish divergence pattern appeared on the EUR/USD and GBP/USD H4 charts on April 4th one day ahead of the NFP Report release as shown below.

Trading NFP Report

Trading NFP Report

As you can see both EUR/USD and GBP/USD H4 charts are showing very strong bullish divergence on Thursday i.e April 4th. By the time of the NFP Report release, both pairs had already gained more than 200 pips. Another 100 pips were added at the time of the NFP Report release. Using my divergence trading system you could have gotten in with a small stop loss. I got in at 1.5044 and my stop loss was just 15 pips. You can read this post where I describe in detail how I use divergences to trade on the H4 timeframe. The crux of this post is that just trade what the indicators tell you. All publicly available information is already reflected in the price and the indicators, so just trade what the indicators show.  I hope you enjoyed reading this post. Please feel free to leave your comments below!

2 Comments

  • Max

    January 12, 2014

    So how close to the actual report did this final bullish divergence appear. Was it a day before the event? Thanks

    • admin

      January 28, 2014

      This divergence pattern can appear a few days before. It can even appear on the day of a major news release. If it does not appear, it means the market will continue in the direction in which it is moving.