Trading the retrace after the news spike

[Fairman]

Trading the retrace after the news spike

The first move after a major release is chaotic. The second is often a retracement, as the initial overshoot unwinds.

A common approach is to wait for the spike, then enter against it as price begins to retrace. The setup has a statistical basis in many cases: spreads normalize, liquidity returns, and the market finds a price that reflects the information without the panic.

There are variants. Some enter at a Fibonacci level of the spike. Others wait for a lower high on a short timeframe. Others trade the first pullback after the initial burst.

The risk is that the spike was the start of a trend, not an overshoot. The retrace trade is then a counter-trend trade into a strong move.

A distinguishing feature is the reaction to the surprise. A large surprise tends to produce a lasting move. A small one tends to produce a spike and retrace.

Testing on historical news days, with tick data and realistic spreads, is the only way to know. The sample sizes are small, since major releases occur once a month, so conclusions deserve caution.

Which events show the most reliable retrace pattern, and which tend to run?

[Amanhasnoname]

For me retail sales and the various PMI releases have given the most reliable retrace, while payrolls and CPI are the ones most likely to run. I kept notes on about forty releases on EURUSD over two years. On the lower tier data, roughly two thirds of the first spikes gave back at least half the move within fifteen minutes. On payrolls it was closer to a coin flip, and the ones that ran tended to run a long way.

The surprise size point matches my experience. I note the actual figure against the consensus as a multiple of the usual miss. Anything more than about twice the normal miss I simply leave alone, because those were the days the spike became a trend and the counter-trade got steamrolled.

The entry that has worked best for me is waiting for the first M1 candle that closes back inside the pre-news range, then using the spike extreme plus a couple of pips as the stop. It means missing some of the retrace, but the spread is back to normal by then and the stop has a clear reason to be there.

[Fairman]

After a major news release, price often spikes in one direction and then partially retraces as the initial reaction settles. Trading that retrace, either fading the spike or waiting for the retrace to finish and joining the original direction, is a common approach for traders who avoid the release itself. The challenge is that retraces vary in depth and timing. Some spikes reverse completely, others retrace a little and continue, and some keep going without any meaningful pullback. Rules for identifying when a retrace has ended are essential. Each outcome needs a different response.