Insider Strategy, or How to Become "One of Their Own" at ECB Meetings

Forex traders are always looking for volatility - they even develop a certain dependence on it, because without movement in the market it is impossible to make a profit. And volatility often comes when some data is released. Around the time important economic news is published, currency markets often show contradictory moves across many financial instruments.

Very many thrill-seekers try to catch a point or two on sharp spikes. This does not end very well, because of the widening spread during a news release, worsening execution, and similar technical details. In the "Insider" strategy, we will focus on only one event - ECB meetings and press conferences (ECB - European Central Bank), add good old statistics, and neutralize the technical problems with a "top-down view".

Platform: Any
Currency pairs: EURUSD
Timeframe: M15
Trading time: on schedule
Recommended brokers: Alpari, Roboforex

There are days with very weak price movement - there is only sideways action and many false breakouts. But there are also days when everything changes: prices jump up or down, sometimes even in both directions within a few minutes. These events can happen completely unexpectedly (for example, due to destruction, unrest, natural disasters) or predictably (when major news events are released, such as gross domestic product (GDP), non-farm payroll data, or FOMC press conferences). Dynamic price movements occur, but you know the date and time of these news releases in advance. I want to offer a trading idea based on the ECB's monthly meeting and show that to make a real profit, we can use an edge based on mathematical probability and market observations.

An old saying goes: "Close your positions before major news releases or, at the very least, place a protective stop-loss."

This is absolutely true. There may be some insiders in the market who know in advance what will be published, but the market's reaction is hard to predict.  In hindsight, we can always explain "why" (if you struggle with this, read the comments of analyst journalists on financial websites).

The key to success lies not in trying to assess the news and how good or bad it is for the currency, but in the ability to extract profit under any outcome.

Figure 1. Example of the EURUSD currency pair's movement on the day the ECB interest rate decision is released

Assumption and logical conclusions

Does it make sense to trade a breakout of a specific price range before the news release? Or, in other words: if the price chooses one direction, will you stick with it during the next hour? In most cases the answer is "yes", at least in the case of ECB meetings.
In the figure below, you can see a sample of the EURUSD currency pair's price movement relative to its price 15 minutes before the news release. The movements are taken from 2013 and 2014 to avoid excessive fitting to current volatility, while at the same time preserving the sample's representativeness and not going too far back in history.

Figure 2. Relative price change of the EURUSD currency pair

At the moment the news about the ECB decision is released, you can clearly see high volatility. The X axis shows the time difference in hours. Therefore, we look at price dynamics for 12 hours before and for 36 hours after the decision.

Figure 3. A more detailed relative price change of the EURUSD currency pair

This figure zooms in on the time scale  after the release of the news about the ECB decision.

Watch the patterns carefully

Before the news release, the market is usually very quiet. But after the decision is published, movement returns to the market, and you can often see that the price subsequently follows the first direction chosen.

How can you tell that the price has chosen a direction? Obviously, it must move some meaningful, but at the same time not too large, distance so that we still have a chance to capture part of the move. Analysis shows that in recent years, the move after which one can draw conclusions about the direction of the trend is about 0.3% of the price. After covering such a distance, the price confirms its direction and moves further.

After approximately six hours, it all ends, and the price stabilizes.

False signals, when the price makes a "deceptive" move in one direction and then reverses, do occur, but not that often. For such cases, the trader always has a stop loss. This trading system is no exception.

Based on these data, it is not difficult to create a profitable trading strategy. A detailed assessment showed that it makes sense to place sell stop and buy stop orders respectively 0.3 percent below and above the closing price of the candle 15 minutes before the news. This means that we open a long position if the price rises by 0.3 percent after the interest-rate decision, or a short position if the price falls by 0.3 percent. 0.3% of the price is a kind of point after which one can speak with greater confidence about the direction of the move.

How do you calculate this very 0.3% of the price in points? Very simply: suppose the candle's closing price is 1.1560. Multiply 1.1560 by 0.003 and get 0.003468. Round it to four decimal places and get 0.0035. Or 35 old points. Thus, in this example, we would place buy stop and sell stop orders 35 points above and 35 points below 1.1560.

As soon as one of the pending orders is triggered, we delete the second one.

The stop loss in each trade will be the same 0.3% of the price. That is, the stop will be at the closing level of the candle 15 minutes before the news.

As for the take profit, there are two options here: 1) 3% of the price, 2) close the trade after 6-7 hours, when activity is already fading.
I prefer the second option. You can also exit at the close of the current daily candle; sometimes, by inertia, the price covers extra points even on low volumes.

Risk management in the "Insider" strategy is quite standard: 1-3% of the deposit per trade.

The "Insider" forex strategy will not appeal to those who like opening trades every 5 minutes; due to fundamental reasons, there will be opportunities to enter only 1-2 times a month. Nevertheless, the strategy should not be neglected, since its effectiveness is high. As an option, it can be combined with your main trading system, which you trade every day. On ECB meeting days, use Insider; on other days, use your usual trading system.

Respectfully, Pavel Vlasov
TradeLikeaPro.ru