How to Trade the CPI

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Video Transcription:

Hello traders. Welcome to the news trading course and the third module news that move the market, profitably enough for us to trade. On this lesson, I’m going to show how to trade the consumer price index. And as we learned on the previous lesson, the CPI is a pretty straightforward release and it’s one of my favorite events to trade because you can get between a 50 and 120 pips move, and sometimes you can even get a larger move than that. But remember that when we are trading the news, we aim for short-term momentum and we have fixed target on our hands.

Trading the CPI

So what we’re going to do is we’re going to go to the Forex Factory Calendar. I’m going to show you the graph of the CPI, then we’re going to the empty for platform and go over historic price action. This is the Forex Factory Calendar, and I have filtered everything but the inflation data and I have only filtered in the US dollar, but you can filter out the Aussie dollar, the Canadian dollar, European use, Japanese use, Great Britain use, and you’re going to see that we actually have CPI for every single currency, so you can actually trade this . . . where you can trade this release on multiple currencies on the same month. But we’re going to focus on the US dollar, consumer price index and as you can see right here, we have the same day the Canadian consumer price index and the US dollar consumer price index.

The previous number was a 0.2%, then we have an increase on the CPI, month over month of 0.1% to 0.3%. If we look at the graph, let’s see how the CPI has, or we are going to see the behavior of the CPI throughout the year. Well, you can see that it’s pretty stable. It ranges from 01% to 03%, you can see that sometimes we have the forecast hit the actual number, sometimes it doesn’t, but you can see that we never get out of this range. Just two times, one time in 2010, and one time 2008, we went below the zero mark to a minor 01% on the CPI, meaning that we were in the period of deflation right here, or on a short-term period of deflation.

But as you can see right now, we are looking to buy the US dollar because the last month’s number was 0.2% and this month’s number was 0.3%. Now lets go to the empty for platform and lets go to the Euro US dollar.

How to trade the CPI

Now, I have here May 22 on the one hour chart, and well, let me just go back to the Forex Factory Calendar to see what time we need to focus on. So the CPI was released at 3:30 p.m. and we are going to focus on May 22nd, 3:30 p.m. okay. Now lets go at 3:30 p.m. right here. Let’s go to the 50 minute chart and scroll back to the mark, and to the one minute chart and scroll back to the mark. Now this is getting very interesting because you can see that we have an immediate bearish pressure on the Euro/US dollar because of the actual release. So let me just grab this and put it on right here. You can see that we have the . . . I’m going to put my mark at 3:29 p.m. so you can see the actual move to the downside, and you can see that it’s a very straightforward move to the downside. So what we’re going to do is we are just going to focus on the immediate range, and the immediate range on this currency was this. We are not going to focus on hourly ranges or hourly levels for a breakout because we want immediate action. So we were trading inside of a triangle.

You can see, it’s more of a wage kind of formation. Let me just thicken this out for you guys so you can see better, and you can see that we were trading inside of a triangle. Now this is the range that we were trading at and to be honest, I really don’t like the upside of the range so if I was trading this event, I would have used this as my upper range. Just because the downside of the wage is perfect for a breaker but the upside of the wage is really not that good of a level to trade a breaker to the upside. So what we’re going to do is we’re going to just apply a black horizontal line right here, and of course this red trend line we’re going to change the color to black because remember that black are our levels that we are looking for a break. Okay. I’m sorry.

Trading the CPI

What we’re going to do is we’re going to go back to the 50 minute chart and we are just going to look for levels as targets. We have the first level right here and I’m just going to zoom out a little bit and we have another level right here. These are our levels to the downside and let’s go to the one-hour chart to see our levels through the outside but because remember, we don’t know which way we are going to trade this event. So our level through the outside would be this level right here and this level right here. All right. So let’s go back to the one-minute chart and let’s go through this trade, okay. Now, let me just go to the one-minute chart and scroll back to the actual release time. Okay, so this is where we were trading at at the time of the release. I’m going to show you where you would have put your pending orders or buy-stops and sell-stops. This is the perfect place to put your sell-stop, okay. Now, remember that we are trading inside of a triangle or wage, okay, and if we are expecting a break to the downside, not only we need to break with the wage but we need to break with the previous law. So this is where you’re going to put your sell-stop. Your buy-stop on the contrary, needs to go above the previous high. This is not the previous high because remember that this is the actual zone of resistance. The previous high is this one right here, okay.

Now, where are going to be your stops? Okay, so let me just use a different color for the buy-stop horizontal line. I’m going to use green, and your actual stop-loss would have been around here, around this base and this would have given you a nice 11 pip stop-loss. Now, the stop-loss for the sell-stop has to go above this highs because remember that if we break to the downside, we might go up and test these areas but if we break with the previous highs around here, our short idea is invalidated. So this gives us a 15 pip stop-loss, okay. If we continue, you can see that immediately when the news is released, you can see that we have a spike up. This is big money, pushing the market up to trigger those stops above this highs or those tides stop and to get a better price to assure this market. So we move up, you can see that our entry does not get hit and we get field on our position, now lets see our first target get hit right here and let me just put on a blue line and you can see that we hit our target for a nice 52 pips. Now you can take out half of your position here or you can take your entire position here. That is up to you. But let’s say that you decided to stay with the short position two, your second target would have been hit around here for an extra 27 pips and an overall 80 pips on your second part of the trade. The CPI is a great news even to trade and you can trade it either on the Aussie dollar, the Japanese yen, Great Britain pound and the US dollar. Always remember, to be safe and always remember to plan your trade and trade your plan.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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