Forex Trading Based on Directional Bias
Now it’s time we discuss the forex trading strategy based on directional bias. But in general, trading based on directional bias is forex trading that uses perceptions of news of economic fundamentals that can drive price movements.
One example of a scenario is forex trading that uses US unemployment rate data. In the previous explanation we have discussed some things that will happen if the data that is out (real) is appropriate or not in accordance with the forecast (forecasting). Let’s say the data on the number of unemployed people coming out is lower than expected, so the value of the dollar will rise but what happens is the opposite (what! What happened! Isn’t the dollar supposed to strengthen when the number of unemployed in the country decreases?).
It turns out that there are several reasons why the dollar is still weakening, even though data on the number of unemployed are decreasing (many people are working, I mean).
The first reason can be caused because indeed the long-term economic conditions of the US state are in a downtrend. Keep in mind that not only the average unemployment data can affect the price movements of currency pairs but there are still some economic fundamental data that can affect the price movements of currency pairs. So even though the average number of unemployed data is decreasing but it is still not enough to make forex traders buy dollars.
The second reason may be due to a decrease in the average number of unemployed but this is only temporary and not for a long time. This means that this increase in the number of jobs is only seasonal (in a short period of time). So this is not an improvement in the economy of the US state for a long time.
The best way that can be done to see whether the number of unemployed has actually decreased or not is by comparing it to the data on the average unemployment of the previous year.
So, the best way that can be done before making a decision is to look at the previous data as a whole.
Now we already know some information that can move the Dollar so it’s time to open a trading position!
Okay, let’s take a simple example in this simulation, namely the economic fundamental data in the form of the number of unemployed in the US. The first step we need to do is to look at the trend of the number of unemployed whether experiencing a decrease or increase. By looking at previous data in the past, we can make an estimate so that we can get ready with what will happen to the next Dollar.
Just imagine that unemployment data continues to experience a constant increase that is six months ago has increased by 1% and a month ago it rose to 3%. From here you have confidence that the number of jobs is getting smaller and there is a high probability that the number of unemployed will continue to increase.
Because you already know that the number of unemployed will increase so this is the time for you to open a Dollar SELL (SHORT) position. And this is what is called directional bias . Let’s say you want to open a SELL position (SHORT) USD / JPY currency pair.
Before the data on the number of unemployed is announced, you can see the movement of the USD / JPY currency pair 20 minutes before the announcement and see the high and low values.This price range will then be your forex trading breakout point.
Because you currently have the view that the dollar will weaken (your directional bias) then you will focus on the lowest price range ( breakdown occurs). You are also hoping that the Dollar will experience weakening, so you put a few pips below the breakout point (or the same as ranging height – 18 pips).
Then you specify Stop Loss at the top breakout point.
One of these two things can happen on the forex market, namely:
- If the number of unemployed decreases, the dollar will increase. This causes the USD / JPY currency pair to move up and your Profit target will never be touched and most likely your Loss target will be touched.
- Or if it turns out the number of unemployed is increasing as you expect then the dollar will weaken. And this will cause the USD / JPY currency pair to move down and your Profit target will be reached.
Because you have set all positions either Profit or Loss, now is the time for you to see your forex transaction running.
Well it turns out the news comes out in line with your expectations and the price of the dollar is weakening. Your Profit target is touched so this is a happy time because this is the right time to shop …. 🙂
So the main key to having directional bias is that we understand correctly behind the economic fundamental data that will be used as a reference for forex trading. And if you do not understand correctly about the effects that will be generated by the release of these fundamental economic data then that is bad news for you!