High impact news-driven price action shows levels, strength of players

Price spikes reveal wealth of info about forex participants

High impact news create a lot of unnecessary volatility. This is always the moment when extreme, wild movement in price takes place. On a chart, we see spikes –  sudden rapid price action. Traders are concerned because this is the time when both long and short positions risk getting stopped out by price spikes.

However, price action created under such high impact news can reveal a lot about effective levels that market participants are actually looking at as well as the maximum power of bulls and bears.

 

Example: Release of FOMC meeting minutes and Ben Bernanke Speech

Let’s take a look at CADJPY during high impact news: release of FOMC meeting minutes and Ben Bernanke speech on 11 July 2013 on 2am and 4:10am Singapore time (GMT+8)

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Release of FOMC meeting minutes

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Price spiking with long tail seen during and after FOMC meeting and Ben Bernanke speech

 

Line chart shows effective levels

If we simplify volatile price movement into just a line showing closing price, it will be easier for us to guess what the market is really looking at. Because closing price is the consensus reached between bull-bear fighting, it could really be described as the level that is most meaningful.

In this chart of CADJPY, there was a huge fight between bulls and bears that printed many long tails in price. If we take away the tails by looking at closing price only, it is a picture of calm that shows us the effective support and resistance levels that were reached at the end of each candle.

In this chart, CADJPY price will only be considered bearish if at any point of time, we see a price close below the lowest previous closing price which is around 95.11.

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Closing price represents the price that traders are willing to take home

 

Price tails show maximum power of bulls and bears

Taking away volatility does not mean that price tails are not useful. In fact, tails printed during price spikes caused by high impact news tells us the ultimate power of bulls and bears.

  1. The highest end of each tail printed during high impact news tells us the power of bulls – it is the highest price that bulls can push to.
  2. The lowest end tells us the power of bears – it is the lowest price that bears can go.

This also means that if price of CADJPY can close below the lowest price created during such an extremely volatile situation, then definitely bears will have the upper hand so price can go lower. Until this level 94.40 is broken, our conclusion is that CADJPY will remain in the current price range.

 

For more analysis on CADJPY (protected blog post for Tflow® students), read this posting: ’Trading JPY crosses – Bank of Japan and Yen Intervention

Read also this posting ‘Marrying the best of line chart and candlesticks; quick tip for MT4‘ where Tiong Hum tells us the best way to have both candlesticks and line in the same chart.

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  1. By Vince Ding

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