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Ok, I understand. News trading is exciting, it’s a rush, it’s big money in a short amount of time. I agree with you. It reminds me of Vegas without the free drinks and the scantily clad cocktail waitresses.

Some people avoid the major news reports because of this considering it too much of a gamble. They wait until the market is quiet to trade. What? Isn’t volatility what we need in the market to make money? There is no better time than trading the Forex news reports if done properly.

Before the News – The Golden Question

Which way is the market heading once that news report is released? If I knew the answer, I’d have more money than Bill Gates. Even though we have 1 specific tool available in our charting package that shows how the large institutions (the “smart money”) are aligning themselves before the news report release, nobody knows for sure which way the market will pop.

The best play here would be to hedge and go long and short the same currency pair. You need to place your orders 3-5 minutes before the news report comes out. If you wait until the report is released, forget about placing an order, the opportunity is gone.

The nice thing is you can place all your orders, including stops and profit targets, before the news report and then sit back and let the trade unfold. By doing this, you’ve done what 95% of traders can’t do – take the emotion out of trading.

So, let’s take the EUR/USD as an example. It’s 8:25 AM EST and the Non Farm Payroll is coming out. You have been waiting all month for this, you even got a new 23 inch monitor for it because this trade will pay for it. If the EUR/USD is trading at 1.3400, you will place the following trades:

Short EUR/USD at 1.3400 with a stop loss at 1.3425 and a profit limit of 1.3355

Long EUR/USD at 1.3400 with a stop loss at 1.3375 and a profit limit of 1.3445

Once the news is released, if price spikes sharply in one direction, it will hit your profit target on one and get stopped out on the other. Let’s look at our example:

The EUR/USD goes up to 1.3500 and our long hits the profit target at 1.3445 giving us a 45 pip gain. It also stops out our short order at 1.3375 for a 25 pip loss. At the end of the day, we had a net profit of 20 pips.

Some platforms don’t allow hedging positions like this. If you are with a broker that doesn’t allow hedging, then follow the strategy below and then find another broker that allows hedging:

OCO Order (One Cancels the Other) to Short EUR/USD at 1.3400 with a stop loss at 1.3425 and a profit limit of 1.3355

OCO Order (One Cancels the Other) to Short USD/CHF at 1.2145 with a stop loss at 1.2170 and a profit limit of 1.2100

First off, an OCO order will cancel the open order once one of the levels are hit. So, in this example if you hit your profit target on the EUR/USD, the stop loss order would be automatically canceled.

Why did we include the USD/CHF? Because the EUR/USD and the USD/CHF are the closest in negative correlation. They are mirror opposites most times. So, if the news is good for the USD, the USD/CHF will go up and stop you out losing 25 pips. The EUR/USD will head lower and hopefully hit your profit target gaining 45 pips with a net of 20 pips. If hedging is not allowed on your platform, this is the best alternative..
more on my next post

hello,
yesterday we discussed a specific strategy that works well for trading Forex when news reports are coming out. The basic strategy is to hedge your position going long and short on the same currency pair with about a 20 pips difference in profit target compared to stop loss. We suggested a profit target of 45 pips and a stop loss of 25 pips creating a net profit of 20 pips.

This strategy works well for news report because you are sure to get volatility, but you don’t know which direction. The downside risks are twofold:

1. Slippage - Slippage occurs when you have a stop loss order in place and the market is so fast that the price moves through your stop and executes you at a worse price than you were expecting. On most brokerage platforms (especially retail), you will get slippage when a news report comes out. Our strategy avoids slippage on the entry trade by placing our orders before the news report comes out. The market is not yet moving fast.

However, slippage on the exit trade is where the problem lies. A typical example would be if you went long on the EUR/USD at 1.3400 with a profit target of 1.3445 and it hit that profit target taking you out with a 45 pip profit.
You also went short on the EUR/USD at 1.3400 with a stop loss of 1.3375 (25 pips), but in a fast market, it actually gets you out at 1.3367. That’s 8 pips of slippage and just caused your net profit to go from 20 pips (45-25) to 12 pips (45-33).
In extreme market conditions, you may get executed away from your stop loss even further and actually come away with a net loss in the position.

There is no way to 100% avoid this situation, however, we suggest finding a non-retail broker with tight spreads.
A non-retail broker will not have any incentive to manipulate pricing (not that this is always the reason for slippage) because they work with no trading desk. This means they simply pass through all of your orders to the true inter-bank market and get compensated by the banks for volume. This puts these firms on the same side of the table as you as they are only interested in you continuing to trade volume with them.

On the other hand, firms that are retail-based with a trading desk are actually taking the other side of your trade (when you go long, they are short and vice versa) so their business model is one in which they have a vested interest in seeing you lose.
So, when they have an opportunity to take advantage of price, they will. You never want your money in play with a brokerage firm that puts their own interest ahead of yours. That is both common sense and not something the “Smart” money does.

An additional advantage to most non-retail firms is that they work on true inter-bank spreads, which are much tighter than the spreads you will find at retail firms. This creates more profit potential for you. For example, a typical spread on the EUR/USD at a non-retail firm is 2 pips, where it’s normally 3 at most retail firms. The GBP/USD and USD/CHF pairs can be as low as 3 pips on a non-retail platform while most retail firms are still at 5 pips wide on these pairs.

2. Whipsaws - Whipsaws are the enemy of this strategy. A whipsaw occurs when the news creates an initial sharp, “knee jerk” reaction in the market (either up or down) and then immediately turns the other way. Where this kills the strategy is when it makes it far enough to stop you out on one side of the trade but doesn’t go far enough to hit the profit target on the other side before it turns the other direction. The result would cause your trade to be stopped out on both positions and a net loss of 50 pips.

Here is an example:

You enter the following orders before the news report is released:

Long EUR/USD at 1.3400 (profit target of 1.3445 and stop loss at 1.3375)

Short EUR/USD at 1.3400 (profit target of 1.3355 and stop loss at 1.3425)

When the news report is released, the market spikes up to 1.3430 and heads back down sharply to 1.3350).

Your stop loss is hit on the short trade during the initial move up to 1.3430 at 1.3425 for a loss of 25 pips, but the long trade is still 15 pips away from hitting the profit target when it suddenly goes back down at 1.3430 and even worse stops out on the way down to 1.3350 at 1.3375 for a double loss. This creates a net loss of 50 pips.That is where good risk mgt comes in to minimize losses and maximize profits,