Trading Scenarios

I’ve been thinking some more about a post by the FX guru of Nova Scotia, Tom Yeomans, entitled “Is news trading dead?” In a tremendously interesting and informative post, after chronicling the history, Tom outlines a view of the future of FX news trading.

He says that it seems now that he can’t straddle the market and he wants to avoid the chaos of the first few minutes after an announcement. As a result he says it is inevitable that he will have to make predictions of what the official numbers will be several hours prior to an important economic report. He suggests that a forecast within the framework of a money management system would permit the pyramiding trades early in the morning based on the assumption that we “know” what the economic report numbers will be. He goes on to suggest that this would more or less emulate the way a large brokerage or investment house would do it.

I agree. I think the most promising approach is to use range of outcomes (scenarios) conditional on a range of forecasts. This gives the likely return and the attendant risk associated with a particular position.

What would this look like? Well, right before certain big U.S. economic announcements we have the results of derivatives auctions that give us a very good view of the market’s expectation. The modeling that I have done links this expectation with market responses. For someone that is interested in the EURUSD following a non-farm payroll announcement, they might be interested the chart of the distribution of market expectations (link to example charts) and what the resulting return chart is for the EURUSD (example charts, and some more).