Chasing and Catching Falling Knives: How to Safely Achieve Forex Profits by Combining News with Technical Analysis

You’ve probably heard the advice to not “chase the market” but also heard the advice to not “catch falling knives.” The former refers to getting into a trade after price has already started moving very fast, while the latter refers to trying to buy at what one may think is the bottom of the market. So what does one do- buy dips or buy when price is moving up? Why do the things in life with largest potential rewards have to be so contradictory?

I feel that both work, but you have to really understand the behavior of the market to be successful at either. Let’s talk about the first option: buying when the market moves up. If you’re using this strategy you want to make sure that there’s momentum behind the latest surge in price. If you see price trickling upward, that’s not as strong of an indication as seeing a full-bodied bullish candle push through a strong level of resistance, right? Well what if we could add another indicator that would boost your winning percentage and profits substantially, while giving you the increased certainty that you’re on the right side of the market?

The indicator I’m referring to is rather the reaction of price to economic news. If price is pushing upward through a strong resistance level due to a better than expected employment figure, that’s a lot more powerful than if price is moving due to some unknown reason. If we look at it in terms of the behavior of the market, if no news release is taking place, that price move could be just due to some temporary business transaction between an FX bank and its exporting customer. After the transaction is finished, the market is likely to come back down in price as selling pressure resumes and the upward move you saw was just a fake breakout. On the other hand, if the move is supported by a positive economic news release, you know that the move is supported by real sentiment and sustainable money flows.

If you want to boost your win rate and confidence in your trading I recommend that you combine price reaction to news with your technical analysis. If you see strong price moves with nice follow through penetrating a support/resistance level, look for a surprise in the released number versus the expected number. For example, if you see a breakout of GBP/USD above a very strong resistance level (e.g. a previous high on the daily chart), if there was a UK interest rate decision of 0.75% instead of 0.50% expected, you’re likely to see sustained upward movement for at least a day. The duration of the extended sentiment will vary with the importance of the news release. News releases are scheduled and can be viewed on news calendars such as that at Forexfactory.com The releases in red and orange have the highest impact on price action. The ones I consider when looking at price moves, in order of importance, are: interest rate decisions, GDP, Employment, Manufacturing/PMI, and Retail Sales.

I hope you consider combining the power of fundamental news with technical analysis in your forex trading. The more you can understand about the true behaviour and motivations of the market moving players in forex, the bigger and more profitable your edge is.