Trading, in any market, is about taking risk on board. Successful trading, however, is about respecting that risk and managing it accordingly, and a large part of that management is being aware of when risk could be out of your control. On Wednesday of this week, when the EIA released their weekly inventory report, the WTI futures market demonstrated why data release points are one of those times.
When I was working in foreign exchange dealing rooms we were subject to very few hard and fast rules, but squaring up in front of major figures such as the U.S. jobs report or CPI numbers was one of the few things mandated. It was recognized that you really had no better idea than anybody else what the numbers would actually be, making any trade in front of them a pure coin flip type of gamble, but there were also other, more powerful reasons not to take a position into a release.
It is quite possible that if you do so you could be completely right in your guess, but still end up losing a significant amount of money. That is what would have happened to me on Wednesday if I didn’t follow that one basic rule. I suspected, based on the last few reports, that the inventory number would be a bad one for oil prices and said as much to the Energy Trader Team Members. I also, however, cautioned against acting on that belief, and I am glad that I did.
(Click to enlarge)
The above chart shows what happened after the release. Oil futures surged on the initial number, which showed a draw down, but then rapidly plummeted when gasoline inventories and refinery utilization added context to the basic number. Given that I was taught to always have a stop loss order attached to any position as a part of basic risk management, that “fake and fade” pattern would have caused me to hit my stop and take a loss, even though my initial guess regarding the data was right.
If anything, that pattern of a false move and a reversal after a major data release seems to be even more common now than it was even a few years ago. I suspect that that is down to the fact that the initial reaction to any news is dominated by the “algos”, the computer driven algorithmic trades. The computer sees the initial number and react, but the humans add the context and the move reverses.
Whatever the reason, though, the fact is that for a trader sitting at home these major data points are just too dangerous to run a position through. A reaction such as we saw on Wednesday probably means that you would have lost money whichever way you were positioned going in, and that is a situation that must be avoided at all cost.