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Sunday, June 26, 2011

10 essential rules for trading Forex news profitably



I have written several articles which are about fundamental forex news trading. This post is a set of rules about one of my strategies which I use, when economic news is released. I have already written a lot on the subject in my previous posts, but let me expand a little on it today. Here are a few tips for you to dwell on before trading any fundamental information. Be sure to read till the end and find a few other very useful tips as well as my general philosophy regarding trading these fundamental events. I will give you a few examples that really sobered me up in terms of trading these special cases and showed me the way how to catch bigger moves when there is a discrepancy between nature of news (positive or negative) and absolutely different market reaction. 

When you finish reading this article, please take your time to read other posts on the subject:

Also watch my main videos on news trading:



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Now, let us go to some rules.

1. Decide which piece of information you want to trade

If you want to be efficient in news releases trading system you have to find out which piece of news is the most important one. Almost every day there could be around 15 chunks of news coming from various countries. You could open any forex trading dealer website and find such information (often it is called ‘calendar’). Most often the news releases are divided in days and majority of providers mark which information is of high, medium and low importance (visit dailyfx.com or forexfactory.com to get all the events for the current and upcoming week). I choose information which is highly important and neglect news which is of low importance and most of the news which is of medium importance. 

2. Now you have to mark support and resistance levels

I base my news trading strategy on breakout of support and resistance, that’s why you have to know and mark those levels on your charts. I do it with all major pairs and their crosses. Support and resistance are places where price came and bounced off. When high time comes you will place a buy stop above resistance and sell stop below the support. 


3. Choose forex pairs you are going to trade for the event

If you want to be successful with this trading method you have to know how to select the best candidates for your trades. You have to decide which pairs are best for you and trade only those pairs. When you look through those pairs, you have to select only those who have the best picture in terms of support and resistance levels. At the time you look at the charts the price has to be in between those levels, preferably in the middle. The best distance from support to resistance is around 80-110 pips. It could vary depending on the pair you are going to trade. Distance can be bigger for gbp/jpy pair and much smaller for eur/chf pair, because gbp/jpy is much more volatile pair than eur/chf. 

4. Now place trend lines

Technical traders know how important trend lines are in technical analysis. So, when you have decided which currency want to trade start placing trend lines. You will have to place 2 trend lines: one 5 pips below support and one 5 pips above resistance 1 or 2 hours before news announcements. Do not place your orders yet.

5. Readjust support and resistance areas

You have to be sure that half an hour before the specific news release you readjust your support and resistance levels. It is highly probable that those levels might be breached and the price is out of those channels. So, you will move a trend line higher if price is above the support and move another trend line lower if the price is below the support. 

6. Define places for orders (long and short) and also stop losses

After you readjusted your trend lines you have to decide where to place your buy and sell stops and also stop losses for those orders. Occasionally I place only buy or only sell orders as sell area or buy area is too far away. If you are a newbie I would not advise you to put more than one order in one direction (one buy and one sell order). You should place a buy stop order 5 pips above your resistance trend line and a sell stop order has to be put 5 pips below your support trend line. Now you also make a decision where to place your stop loss order. You should not risk more than 2 percent of your deposit on any given trade. It does not matter whether it is this specific strategy or any other trading system. 

7. Choose a place where you are going to take your profit 

At this stage you are very close to the news event and you have to decide where you want to exit your profitable trade (if it is going to be profitable). If you are not a newbie you can trade with two positions and close your first one at the closest support or resistance level, depending which direction market will take. I also mark even number levels (you must have noticed that).  Big boys usually take their profits there and so should we. The second position (if you take two positions in one direction) you can ride as long as the market exhausts itself. 

8. Now is the time to place orders

When 2-3 minutes are left before the release, start placing your orders, starting with the level the price is at a greater distance from the level. If the price is 20 pips from resistance and 50 pips from support you place a sell stop below support first. And vice versa, if the price is at a greater distance from resistance you place your buy stop above the level first. After that you place your second order. By now the news might be hitting the market. 

9. Readjust your open orders

When the news comes one of your orders is opened. What do you do now? You should also move your stop loss order below/above 15 minute breakout candle as soon as you can. This is how you reduce your risk and increase your profit. At this stage you also remove the order that was not opened. 

10. Exit your trades

One way you exit the market is when your take profit is reached. That’s when your platform should close your order automatically. Another way is when your stop loss is hit. If you have been moving it in the direction of the move it is in the profitable area and you exit your trade with profit. It is also possible that when news is released, you have choppy price action and your stop loss order is hit. So, you lose the amount you have pre-planned. You then wait for another opportunity to trade news. 

My general philosophy about trading news

When news is released I want to see how market reacts to it. It often happens that very good news comes and the market completely ignores it. It shows that there is a prevailing opinion among big market dogs where the price should be headed. The same can be said about bad news. When tendency is present market will shake this news off. 

When I started trading Forex in 2004 I remember one particular instance that shocked me and turned around my thinking regarding the question. It was Friday and Non Farm payrolls had to be released. These were times when market would wildly react to the data and you would often see 200 pip moves in a matter of 1 second. Sometimes even 300 pip move! Now, that particular Friday the news came and it was extremely good. Job market created twice as many jobs as was expected and it was the highest number in four or five years. To my greatest surprise US dollar rallies a little and then sold off. I lost on the trade. However, I gained much more than I lost. When you see these things happening, just trade in the direction of the market. Leave your opinions and adopt the opinion that the market has. You will win in the long run.

I saw these kind of situations repeat again and again. Most recently I saw it happen to New Zealand dollar. On the 13th of March (2013) there was interest rate decision from the Bank of New Zealand. The governor did the ‘currency war’ talk by expressing his wish to see New Zealand dollar lower. The market reacted initially and the kiwi fell. However, the next day it rebounded and proceeded to making new highs for the year. 


Conclusion

As you may see there are a lot of ways to trade fundamental news announcements. It is important to follow a strict set of rules. It is likewise essential to understand that even the news that is of high importance often has short term impact and market often goes on in the direction it wants. So, if you intend to trade these events be sure to watch how market reacts to news. You might catch pretty big moves and make nice cash as a result. 

Ok. I hope you benefited from the post. I would continue the topic of different market states in my next post. Hope to do it very soon! If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.


Disclaimer
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.