Build scenarios like a proDecide what you will do before the number.
Instead of predicting the week, professionals write down 2 or 3 possible outcomes, give each a rough probability and decide in advance what they will do. The routine takes about 5 minutes.
A routine in 5 steps
Scenario planning sounds complicated, but it is a short, fixed routine. You start with your trade idea, list the events that could affect it, sketch what each outcome would do, give each outcome a weight and write down your reaction. The result is a set of “if this, then that” rules you can follow when the news lands.
The point is to make your decisions while you are calm. A decision written down the day before is made with a clear head. One made in the first minute after a big release is made under pressure, with price jumping and little time to think.
Write the trade in a sentence, with the reason behind it.
Every release and central bank event this week that could hit it.
What each result would do to your currencies.
A rough probability for each, from forecasts and the bigger picture.
An “if this, then that” for every outcome.
A worked example: short USD/JPY
Say you want to short USD/JPY because US inflation is falling and the Fed is expected to cut rates soon. This week, 3 events could affect the trade: the US inflation numbers, the minutes of the last Fed meeting, which are the detailed notes of what was discussed, and Japanese wage growth.
Now ask what could happen at each one. If US inflation comes in above the forecast, the market expects a tougher Fed, USD/JPY rallies and your trade is in trouble. If it comes in below the forecast, bets on rate cuts grow, the dollar weakens and your trade speeds up. If Japanese wages jump, the yen gains on hopes of higher rates from the Bank of Japan, and your short gets a second tailwind.
Give each outcome a weight
Not every outcome is equally likely. Based on what the banks forecast and the bigger picture, you might put US inflation above the forecast at 30%, below it at 50% and in line at 20%. The numbers are rough, and together they add up to 100%. Think of them as a confidence score that shows which outcome you expect most.
Then map your reaction to each one. If inflation is hot, you consider cutting the position straight away. If it is soft, you hold, and you may add on a clean pullback during the day. If it is in line, you watch the mood and risk appetite before you act.
Consider cutting straight away
Hold, maybe add on a clean pullback
Watch the mood before you act
Write it down before the week starts
Put it on paper. It takes about 5 minutes, and 2 or 3 scenarios are enough, each with an “if this, then that”. With more, the note gets too long to use when the number lands.
Here is a second example. You are short AUD/USD, and Chinese inflation data is due on Thursday. China is Australia’s biggest trading partner, so the Australian dollar often reacts to Chinese numbers. If the data beats expectations, Chinese momentum picks up, the Australian dollar rallies and you reduce risk at once. If it misses, Chinese weakness is confirmed, the Australian dollar sinks and you hold full size. If it is in line, there is no catalyst, so you watch the chart and wait for the US session.
With a note like this, you walk into the week with your decisions already made. When the number hits, you do not panic and you do not chase, because you have rehearsed it.
Don’t marry one outcome. Think in “if, then”.
Chinese momentum picks up, AUD rallies: reduce risk at once
Chinese weakness confirmed, AUD sinks: hold full size
No catalyst: watch the chart, wait for the US session
Mistakes to avoid
- Writing outcomes without actions. A scenario only helps when it ends in “then I will”.
- Planning only the outcome you want. The scenario that hurts your trade is the one that needs a plan most.
- Treating your probabilities as facts. An outcome you rated at 30% will still happen about 3 times in 10.
In short
- Scenario planning is a 5-step routine: the idea, the events, the possible outcomes, a rough probability for each and your reaction.
- Weigh each outcome from forecasts and the bigger picture, such as 30% hot, 50% soft and 20% in line, and decide your reaction to each.
- Write 2 or 3 “if this, then that” scenarios before the week starts, so you follow a plan when the number lands.
Key terms
- Scenario planning
- Deciding in advance what you will do in each likely outcome of an event, before the event happens.
- Forecast
- The expected value of a data release, usually the consensus of economists. Compared with the actual number to measure the surprise.
- Inflation
- The rate at which prices rise. Central banks usually aim for about 2% a year.
- Key interest rate
- The rate a central bank sets for lending to banks. It drives borrowing costs across the economy and is one of the biggest drivers of a currency.
- Pullback
- A short move back against the main direction before price carries on. Waiting for one often gives a better entry than chasing the move.