Combining two of anything is usually more effective than one. Burgers and fries, music and sound, and even two Forex strategies.
Smart Combinations Separate Amateurs from Professionals
Smart traders don’t rely on one piece of data, strategy, or indicator. They combine strategies, with news releases and any other information that’s necessary to have a complete understanding of market conditions. A golden combination is price action strategies with the consumer price index.
Combining news releases with price action leads to a comprehensive understanding of how prices are shaping the Forex market. The most common news release that traders pay attention to is the Non-farm payroll report, but let’s not forget about the Consumer Price Index, often referred to as CPI. The combinations of the price action strategy with the CPI opens up endless opportunities for traders.
What is the CPI?
The Consumer Price Index is a pretty straightforward news release that helps you get between 50 to 100 pips to move. The key economic indicator shows the current growth and inflation levels of the economy.
The CPI report gauges price changes at a retail level on the demand side. It calculates the average change in prices of goods and services at the consumer level. It focuses on products and services bought on a monthly basis for a given period of time. Food and energy are excluded from the Core CPI because their price changes constantly.
Every country has its own CPI, and certain regions such as the EU have a collective CPI. The report usually comes on a monthly basis around the middle of every month.
Why is the CPI report important?
CPI data is a strong measure of inflation, and it’s taken into consideration while formulating the monetary policies of an economy. This makes the CIP an integral part of many important financial indicators such as interest rates.
In the case of interest rates, a trader can look at the CIP report and estimate that the higher the inflation, the higher the interest rates. The higher the interest rates, the stronger the currency.
Let us see how this works. When the inflation rate goes up, there is more money chasing few goods in the market. To check this trend, central banks will increase interest rates so as to make borrowing costlier and thus restrict spendings in the economy. The reverse happens when there is deflation.
Thus, consumer price index data is a key factor that influences the strength of a country’s currency. Forex traders focus on the percentage change of CPI over a given period.
How to Combine CPI with Price Action?
Now let us look into ways of combining this data with effective price action strategies so as to gain maximum advantage. Look at the news release data below, which shows the CPI to be 265.6.
USD/JPY: News Release Data: May 12
Now take a look at what happened in the price action chart at the time corresponding to this news release.
Price Action Chart: USD/JPY: May 12
As you can see from the chart, the market fell at the time of news release but within a week the price moved up contrary to popular belief/expectations. The price movements shown before the red line pertains to the day before news release and those shows after the red line pertains to the days after the news release.
This shows that the big players of the market like financial institutions, etc. already had an idea about the data that was going to be released.
1) The news release was negative
2) The big boys pulled the price down
3) After the news release, retail traders mistook the data to be negative and thus went for a buy
4) However, after 2 days, the price went up, once again proving that the market always respects the support and resistance levels
Key Learning Takeaways:
Though the data was negative, the price went up from support level. This is what we call news that are already discounted by the markets. Market constantly respects support and resistance. Even if a negative data comes near support line, there is higher probability for the market to recover eventually. Also, bigger players like large financial institutions want retailer traders to go against the actuals.
Those who have undergone professional training in combining news and price action would be able to spot this and act accordingly.
Now take a close look at the figures on GBP – CPI on May 20.
GBP/JPY: May 20
And now look at the price movement chart below:
Price Chart: GBP/USD – May 20
Key Learning and Observation Takeaways:
1) The news release was negative
2) The big boys pulled the price down already
3) After the news was released, retail traders thought the data to be negative and hence went for the SELL option
4) However, after few days, the price went up
5) This means the price, in most cases, respect the support levels
6) Though the data was negative, the price went up from support
7) This is called news already discounted by the markets
8) Big boys want retailer traders to go against the actuals
As you can see, when combined with simple price action strategies, the power of your informed decisions increased two-fold. If you follow the same method of combining other news releases with suitable price action strategies, you can expect to make similar top quality informed decisions that will give you a consistent profit.
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To learn more about that, you may contact Axiory who provides professional training on practical methods of combining news releases with price action strategies.