I tested a Trading Strategy 100 times and saw something really surprising!
You have probably seen sudden big moves like this on the chart.
These are usually caused by a news event.
Since these are usually big moves, if we manage to take trades in that news move direction, our profit will be huge even with a small risk.
But these big moves look random, right?
So I decided to test these news moves to see if there is a predictable pattern.
If there is, then we can trade them to make a profit.
But what kind of news events cause these big moves?
Well, there are a bunch of them.
Company Earnings, Interest rates, and so on.
What I want to focus on in this video is the Inflation data news events.
They look something like this.
If you search the US CPI data, you will find an investing dot com page.
It will show all the previous inflation rates, when the data was released, and when the next data will appear.
What I want to find out is where the price moved after this data was released.
Like, if the inflation rate came higher, did the price go up or down?
If it did, was that a predictable pattern?
If yes, then what was its win rate?
In theory, when inflation comes in higher than the previous rate, the market thinks that the interest rate will go up to cool down the inflation.
Higher interest rates make that country’s currency stronger.
In this example, since we are looking at the US inflation data, the US dollar can move higher.
In the USD JPY chart, USD is on the left side.
When the US dollar gets stronger, USD JPY can move up.
In the EURUSD chart, USD is on the right side.
When the US dollar gets stronger, EURUSD can move down.
In both cases, USD is getting stronger when the inflation rate comes in higher than before.
But if the inflation data comes in lower, then the USD can get weaker.
In that case, USDJPY can move down.
And EURUSD can move up.
But there is just one problem.
Many times, this inflation data is already priced in.
Institutional traders or big market makers already anticipate the next inflation rate.
You can even see a forecast rate mentioned next to the actual rate.
If the inflation rate was already priced in, then when the same expected rate appears, the price is probably not going to make a strong move.
However, here’s something interesting.
If the actual inflation rate comes in different from the forecast rate, then not everything was already priced in.
The data is new and unexpected.
Now, there is a much higher chance of the price reacting to this news event.
This is when you can see really big sudden moves.
So, I want to test 2 things.
The win rate of news moves when the actual rate is higher or lower than the previous rate.
And the win rate of news moves, when the actual rate is higher or lower than the forecast rate.
So, I used the last 100 Inflation data, went to the EURUSD chart, and checked where the price moved 5 minutes after the data release time, 30 minutes after, and 4 hours after.
I’m testing different time periods to see if there is noise when the data appears, and where the price moves after the noise has calmed down.
So, after looking at 100 different setups from now to 2017, this is what happened.
Let’s start with the first pattern.
Did the EURUSD price move up when the actual inflation rate was lower than the previous rate?
In other words, did the USD get weaker?
Furthermore, did the EURUSD move down when the actual rate was higher than the previous rate?
In other words, did the USD get stronger?
The answer is a big yes!
In the first 5 minutes of the data release, this happened around 56% of the time.
In the first 30 minutes, this happened around 55% of the time!
Not only that, in the first 4 hours, the win rate was even higher at 61% of the time.
But hold on, it gets even better.
You know how I said, these news events are usually already priced in?
Well, let’s look at the win rate when they were not priced in.
Let’s see when the actual rate was different than the forecast rate.
So, did the EURUSD move down when the actual inflation rate was higher than the forecast rate?
In other words, did USD get stronger?
Furthermore, did the EURUSD move up when the actual rate was lower than the forecast rate?
In other words, did USD get weaker?
The answer is a massive yes!
In the first 5 minutes, the win rate was a big 67%.
In the first 30 minutes, the win rate was still high 60%.
And in the first 4 hours, the win rate was a nice 69%.
Since the 4-hour had the highest win rate both times, the smaller time periods probably have more noise. Like more random up-down movements in the first few minutes of the news event.
The news direction becomes clearer over a few hours.
In other words, it’s better to take trades that will last a few hours in the news direction instead of a few minutes.
This inflation news trading data we have found is pretty useful!
I mean, I have been making decisions based on this inflation and interest rate data for the last 3 years.
I have talked about inflation data and how I was going to make decisions around that data many times over the years, with Patreon supporters on Discord.
Since one of the reasons the stock market went down in 2022 was high inflation and interest rates, this CPI was one of the data points that helped me decide when to enter and increase risk.
It helped me achieve the highest profit of my trading journey so far.
But I didn’t know the short-term price movement after the inflation data release time would also be this good.
I didn’t know it had such a high win rate.
But this high win rate could also be temporary.
Many traders and investors were watching inflation and interest rate data when they were high a few years ago.
I’m mainly a technical trader, but I was also paying attention to it.
Because the price was just reacting strongly to these inflation and interest rate news events.
In the future, if these news events become less attractive, the price reaction can also calm down.
Still, the last 7 years of data says the Inflation News Event has a really good win rate.
Many of these moves are big, but I will try to create a detailed entry strategy around this news move and then test it in one of the future videos.
Like, what is the best place to set the stoploss and profit targets?
And more.
I will do that in one of the future videos.
So, subscribe if you want to see that!
Thanks for watching.