News Trading Strategy

News Trading Strategy

This article was reproduced from Forex Trader Magazine

For more details of the magazine please go to: http://forextradermagazine.co.uk

Trading on economic news releases can be very profitable for us private FX traders: the key is to understand where, when and what information is going to be released and then deciding how to take advantage of it. Preparation is essential to all of this. Here I describe one relatively simple trading technique that can be used to trade key economic news releases.

The impact of particular types of news releases can ebb and flow. Sometimes markets are sensitive to a particular release while on other occasions they are not. In some cases, the markets can move strongly in what looks like a logical direction in response to the news and in other cases they can move strongly in defiance of perceived logic.

In general the economies of the globe are interrelated. For example, news that directly affects the value of major currencies like the EUR and the USD will have an impact on other currencies as well. Plus economic news emanating from governments together with news from other markets, like oil and precious metal markets also affects currency movements. For example a significant change in the price of oil can have a significant impact on exchange rates.

Economic calendars keep traders informed of what and when potentially significant scheduled news is due to be released. Also, these calendars tend to give a heads up on what the news is forecast to be; this is very important as it is generally the differences between the forecast and the actual figures released that drive price movements. We use the free economic calendar available at www.forexfactory.com for our information and have found it to be very useful in respect to scheduled economic news.

As private forex traders, we are mainly, as far as this particular technique is concerned, interested in the news released on the first Friday of each month. This particular release date covers the news items on which this technique depends; Trade balance, Employment Change and Unemployment Rates coming out of the USA and Canada. It also covers the frequently market moving US Non-farm Payroll figures which are released on the first Friday of each month at 8.30 am EST (1.30 pm GMT).

So, how do we use this market information to benefit our FX trading? The following examples will explain our thinking and strategic processes.

First let us consider the Trade Balance news release from Canada, our strategy would suggest that traders use this to inform their thinking on the main pair involving the CAD which is the USD/CAD pair only. This is because the CAD is one of the lower volume pairs commonly traded. The actual test used to determine whether a pair should be considered under this strategy is that the spread must be a maximum of 4 Pips.

Then we have the Trade Balance figure from the USA, our strategy would suggest that this is used to inform trade decisions in respect of the main currency pairs that have the USD as their base currency or counter currency that have strong volume.

The essence of the strategy

The 15 minute chart time interval is recommended for this strategy.
• Set a Buy Stop pending order 20 Pips above the current price immediately, say 10-15 minutes before the significant news release on the first Friday of the month.
• At the same time set a Sell stop pending order 20 Pips below the current price.
• Place Stop loss orders 20 pips away from each pending order entry price.
• Place Take profit instructions 60 pips away from each pending order entry price.
• The Risk to reward ratio of the strategy is 1:3.
• Use very small trade sizes such as 0.006% of equity for spread betting or 0.1 lots per $1,000 (1.0 lots per $10,000) for forex trading.
• Close any pending order that has not been triggered within 3 hours of the news release.

Cancel one pending order once the other has been triggered.

Examples – Friday 5 April 2013

At the expected time, 8.30 am EST (1.30 pm GMT) the following news items were released. They are shown with the forecast and actual results that were announced:

CAD Employment Change: forecast = 6.8K, actual = -54.5K
CAD Trade Balance: forecast = 0.2B, actual = -1.0B
CAD Unemployment Rate: forecast = 7.1%, actual = 7.2%
USD Non-Farm Employment Change: forecast = 198K, actual = 88K
USD Trade Balance: forecast = -44.8B, actual = -43.0B
USD Unemployment Rate: forecast = 7.7%, actual = 7.6%
Source: www.forexfactory.com

These news releases had a negative impact on the CAD and a positive impact on the USD. In all of the examples below the news release led to Buy Stop being triggered.

In the charts shown below the red vertical line shows where a trade was entered.

Trade A – based on the US Non-Farm Payroll announcement

The NFP (Non-farm Payroll) is important economic news in the US. The figure announced is the total number of paid employees in the United States excluding those employed on farms, or by governments, charities and private households. The NFP figures are probably the most powerful of the scheduled economic news announcements and frequently trigger high volatility in the FX and Stock Markets. Because of this, the announcement is watched carefully by currency traders, fund managers and others. In turn this interest impacts on and magnifies the power of the figures to move exchange rates. Strangely, this news item regularly moves markets even when the actual announcement matches the forecast!

example news trade A

Trade A

It can be seen, on the above chart that the USD/CAD was relatively calm just before the news items were released. A Buy Stop and a Sell Stop order were placed. The Sell Stop Pending Order was immediately cancelled once the Buy Stop order had been triggered, and the trade resulted in a profit.

Trade A involved the USD/CAD. It used a pending Buy Stop with an entry price of 1.0142 a Stop loss at 1.0122 and a Take profit instruction at 1.0202. The exit price was at 1.0202 giving a profit of 60 pips.

Trade B – Based on USD strength and JPY weakness

During the Monday to Friday morning of the week in which 5th April 2013 occurred, the USD/JPY had moved upwards by almost 500 Pips. The news that was released that Friday supported the strength of the USD. This situation signalled that a trade using this pair was “on”.

Example news trade B

Example news trade B

Although the set-up supported an upwards movement in the price of this pair, as the “rules” dictate, two pending orders were put in place prior to the news release. As expected it was the Buy Stop order that was filled. As soon as this occurred the Sell Stop Pending Order was cancelled.

Trade B involved the USD/JPY. The Buy Stop pending order was triggered at 95.95 and a Stop loss was placed at 95.75. The Take profit instruction was set and triggered at 96.55 to give a profit of 60 pips.

Trade C – Based on GBP support strengthening

Early in 2013, Cable (GBP/USD) was in a strong down trend. However, by early April it was strongly resisting further downward moves and support was strengthening.

Example news trade C

Example news trade C

A Buy Stop and a Sell Stop order were placed, and the buy Stop order was filled. The Sell Stop Pending Order was quickly cancelled.

The trade was on the GBP/USD pair and the buy Stop order was placed at 1.5150 with the Stop loss set at 1.5130. The take profit instruction was at 1.5210 which was also the exit price and the result was a profit of 60 pips.

About The Author

Jeff Fitzpatrick

Probably the UK's most successful home Forex trader