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.
Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice.
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:
Now, let us go to some rules.
Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose. Past performance is not an indication of future results. This content is for educational purposes only and is not investment advice.
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:
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.
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.