Beware the 'Rogue Wave'

If you live anywhere near the ocean, you’re familiar with term ‘undertow’. Undertow is a current beneath the surface that runs away from the beach in opposition to the waves which break toward the beach. Undertows are dangerous because they can drag a swimmer out to sea despite all efforts to swim ashore.

Feeling any empathy for the swimmer caught in a current going against him?

Like undertows, ‘rogue waves’ are threatening, not because they can drag a trader down and out to sea, but because they are both unpredictable and enormous in size. Rogue waves can be and often are, fatal; a not so charming characteristic dramatically portrayed in several popular movies.

Unexpected NEWS is the ‘Rogue Wave’ of trading, and today we had a good example of what a rogue wave can do when it crashes down upon the forex market.

Today, Friday, November 3rd, traders expected the non-farm payroll report as it was scheduled for release at 8:30 AM. The consensus was that the number for October would low as the U.S. economy is thought to be in a slowing phase.

As is typical on such days, volatility was expected. What often happens, in fact, is that omnivorous traders drive down the price of popular currencies such as EUR and GBP just prior to release of the news … purposely feeding on the easy prey by swallowing all the stop loss nets put in place by unsuspecting traders. Hey, never said trading was for sissies!

Anyway, true to tradition, at approximately 8:15, the EUR dropped to 1.2755 and then jittered about a bit. I went long at 1.2763. At 8:30, the EUR shot to 1.2792 and I attempted an exit - without success as prices were changing too fast. Then, the EUR ratcheted back hard and I was lucky to exit at 1.2769 … booking a 6 pip profit …

… then a ton of real crap hit the fan … and EUR dropped like a 10 ton steel safe falling from the 40th floor … not slowing at all as it ran down 30 … 40 … 50 … 60 … 70 … 80 pips … not hitting bottom until 1.2681 … a total of 118 pips from its high and 88 pips from my lucky exit at 1.2769.

What the Hell had hit EUR – and driven USD up like a cork from the ocean floor?

NEWS! A damn rogue wave of news!

October’s non-farm payroll report had a low number … only 91,000 jobs and more or less predicted … but, September’s earlier number had been revised up from 51,000 to 148,000 jobs … and traders interpreted this, as well as related news that the unemployment rate had dropped to 4.4% ... as inflationary. Interest rates immediately screamed upward more than 100 basis points before exhausting the inflationary fuel that propelled the launch.

‘Rogue Waves’ are huge and inherently unpredictable … and yet this news event was predicted … and everyone was intensely focused on the numbers … traders just expected the news to drive prices in the opposite direction!

The lesson is that Rogue Waves can strike at any time … even when a news wave has been formally scheduled! Rogue Waves are nearly impossible to trade and represent far more peril than opportunity. At a minimum Rogue Waves are as dangerous to traders as undertows are to swimmers. More often than not, when Rogue Waves roil across the forex market, traders hear two words blackjack dealers love to speak: "You lose."