News announcements generate some of the best trading opportunities that exist in the markets. This style of trading has one distinct advantage over other styles of day trading and that is from a time management point of view. A news strategy allows you to pick exactly when you want to trade, you could pick just the very major announcements and just trade 5 or 6 times a month and potentially make quite a substantial income.
Some of these that I consider to be great opportunities are:
NFP – Non Farm Payrolls
CPI – Consumer Price Index
GDP – Gross Domestic Product
New Home Sales
This is by no means a comprehensive list and each country has different announcements that can effect it’s currency. I only trade the US announcements and really only trade the eur/usd or gbp/usd on these types of trades. Forex Factory has a good comprehensive calender here that will give you all the announcements for the week and rates them as high, medium and low impact announcements.
Working out just how much of a surprise is the only real challenge with this type of trading and does require a bit of homework to ascertain what would be a minimum surprise for you to take a trade. To get these figures I have used a combination of ForexTester (which anyone who follows this site will know I consider an absolute must for anyone wanting to succeed on this path) and Forex Factory that has a 10 year history of economic announcements on their site.
For all examples in this article I will use the NFP announcement as in my personal opinion it is the best of the best when it comes to news trading announcements. For me I look to see a change of a minimum 80k in the number for me to even take a trade, anything less and that’s it I just turn off my computer and call it a day. I recommend you all do your own back testing and armed with that knowledge you can choose at what level you feel you are comfortable the odds favor a decent move.
This strategy will complement My divergence strategy that I wrote about previously. I am working on the same principal that when there is a significant surprise and as an example that it is positive for the currency, I am only interested in trading in that direction, this is paramount and trading the other way is next akin to trading against the trend. This is a distinct advantage as I now know which direction I am going to trade and now just need to find an optimum entry point, stop loss and profit target.
I rarely trade the breakout of the number as unless you have access to an exceptional broker the odds of getting filled are not good. You can place a trade and get filled 50 pips later only to watch price retrace and take out your stop, I am yet to find a broker that you can get a decent fill in these scenarios. There is one exception to this rule and that is when I witness a huge spike in price in the opposite direction to what I expected. This to me is like waving a red flag at a bull, when I witness this type of price action it is time to load the boat. I will generally go to my maximum level of risk on this type of trade as the rewards can be exceptional.
Why do these spikes happen? This is the market makers and banks targeting stops before taking the market in the right direction. I see these situations all the time and they are what are known as false breakouts, these banks and market makers have the luxury of seeing exactly where all the orders are and if they are within their reach they will drive price in that direction, take out all the stops and then drive it back the other way and thus literally double dipping and accumulating more profits for themselves. I personally don’t have access to these orders but just by understanding what is happening I can capitalize on this situation and literally ride on their shirt tails. I am writing a separate article on this trade so keep your eyes peeled for that one, it wont be far away and I will add a link to this post when It’s done.
My goal in this situation is I want to wait for price to have its first run then when it starts to pull back I look for an entry to get in on the retrace. This for me is completely discretionary and I have a number of things that I look for to enter a position. I use a combination of candlestick patterns, oscillators, a moving average, Fibonacci retracements, support and resistance and the count back.
Depending on the type of announcement depends on how large a move price will initially take. For the NFP when the numbers meet my criteria I expect to see an initial move of between 50-90 pips. It is possible to capture some of this move but it is definitely not the easy money, for this trade I am only after the easy money and this is simply a matter of waiting until all the players have cast their vote. At this time we know the direction and are then awaiting a pull back in price for an entry opportunity to present itself.
The entry is then a matter of getting aboard the move once price has retraced. You will have to establish your own entry criteria but what we are looking for is a reversal or a rejection of a price level, this could be as simple as a pin bar at the 50% fib level or any signal that meets your own personal criteria.
To establish a stop position for this type of trade is very easy for me as trading these small time frames I am trying to keep my risk small and position size appropriately as large as I can in accordance with my own risk parameters. I simply place my stop a few pips below the low of the reversal point I have identified as my entry.
Setting profit targets is of major importance to the success of any trading strategy and extremely challenging for most new traders. There is always the challenge of how to identify when to exit a position. For most it is a matter of finding a balance between protecting profits that are currently on the table and exiting to early in the move and leaving a large percentage of the profits on the table.
This process for me is quite simple and easy as I use three indicators to identify when to exit a position or at least take partial profits. The indicators I use are support and resistance, recent swing highs and lows and the ADR or Average Daily Range.
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To Summarize the process should be like this:
Just before News is released asses where the profit targets are
What is the high for the day?
What is the low for the day?
What is the ADR for the currency pair?
What are the most recent swing highs and swing lows?
Project profit targets using the ADR
Once the figures are released we then assess them and ascertain whether they meet our trade criteria. This is a simple yes we are trading today as the figures are within our guidelines or no they don’t meet our criteria so no trade.
If the figures meet our guidelines it is then just a matter of observing price action and identifying the first significant retracement in price.
We then take a position using our entry rules.
Place the stop just beyond the high or low of the retracement.
Since we have already calculated our profit targets its is then just a matter of observing price and taking profits appropriately.
This is my News Trading in it’s simplest form and if this is not completely clear don’t panic as there will be plenty of follow up articles. I am also making videos of trading examples which will make the whole process much clearer. I will post the links to other articles in this post as I produce them.