How I Trade The News - Part 3 Final Series

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

In the previous section, we looked at the materials i use in trading the news and setting up my chart. I also explained some essential steps that helps me get set for the news, and some important market signs to look out prior to the news release.

In this conclusive part I'll clearly explain the trade actions (best pairs to trade), order placement/planning, chart setup, managing the trades and some other tips i use to trade the news. Before we start lets see some pre and after news event in the charts below.

INFO: "To straddle or not to straddle? Which is better? See; Straddling Vs Auto Click Trading System".

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Setting Up The Chart

In order to manage my system resources I do not setup every chart with the template above. Some of the items in the template require consistent data download and updates, which is capable of impacting the platform's efficiency during high impact news release. The session time indicator and pivot indicator are proprietary indicators designed by Forex21 (ProFx3.0.5). They are not included in the download link. (Download full chart setup materials: Zip File ).

I recommend 30 Minutes chart. Be very careful trading the news with lower timeframes.

First Thing First - What Pair Should I Trade?

A deep understanding of Forex currencies with regards to their correlation, similarities, dominance, and political/economic relevance with other currencies would help you to an extent to know which pairs are best to trade for a particular news release. Also it is common for some currencies to be correlated with commodities & precious metals like Gold and Oil. The simple principle in news trading is that a good or bad economic outlook on a currency would positively or negatively reflect on its pair. For example if the UK CPI meets investors expectation for a particular period then some of the weaker pairs with the British Pound will experience a sudden negative effect because investors (traders) will sell them off and buy the GBP. So traders most often lookout for the stronger and weaker currency pairs to trade, while avoiding correlating pairs.

TIP: There is a utility designed by Henry Liu (www.currencynewstrading.com), which displays the real time economic outlook of currencies. The utility helps to decide which pair should be traded against each other. Download Henry Liu's Currency Strength Meter.

Basic rule of selecting a currency pair:

Auto/Manual News Trading EA

1. In expectation of a positive news outcome, BUY the stronger currency, and SELL the weaker one.

2. In expectation of a negative news outcome, SELL the dominant stronger currency, and BUY a relative stronger one. In some cases the weaker currencies could be bought but the position should not be held for too long.

CAUTION: In some cases we've seen a good

economic outlook on some country's economic data but with an opposite reaction after the news release. This implies that a positive economic outlook of a currency does not mean you have to buy it and sell the weaker currency. It is necessary to consider other fundamental macro economic factors coupled with the recent economic performance history of the currency.

TOOL: Comprehensive list of all the news trading items with the recommended pairs to trade. Recommended Currency Pairs For News Trading

TRADE ACTIONS

Before you begin ensure you've understood pre-news market signs, and market behaviour prior to news release else refer to Part 2. Also you must have selected the right pairs to trade the news.

What Pairs Should I Trade?:

It is extremely important you pick the right pairs for every news trading. The rule of thumb is to pair the stronger/weaker currency pairs. In some cases you can trade certain commodities and precious metals also. For further guidance refer to: Recommended Pairs For News Trading.

 

Snapshot of Henry Liu's Currency Strength Meter

Placing Orders

Generally wait for at least 10 - 15 minutes before placing pending orders. This gives you a clearer picture of the best place to set pending orders. There are various methods i use in placing pending orders depending on the type of news and market initial reaction. Here are the two (2) main methods:

1. If The Market Is Static (i.e no quick up and down irrational movements):

Prior to most high impact news release, the market often times becomes static or move in a very narrow channel. This is one of the best market signs for news trading. In this case I set pending orders manually or with the guide of the Simple_SR Indicator. (For Take Profit, Stop Loss & Trailing Stop see Trade Management).

Illustration of narrow movement of price prior to the news release. Click to enlarge

2. If The Market Is Erratic (i.e. quick up and down small movements few minutes to the news release):

In this case the market reacts to traders psychology/sentiments towards the expectation of the news release. This is witnessed few minutes to the news release with a slow but steady movement of price to a direction and then it halts, goes back and continues again but not cutting across a certain price level or forming a resistance at a certain level. This often occurs when the analysis of the economic news components shows a high probability of an actual outcome. In other words there is a sure tendency by traders that the news outcome would certainly come out as expected. In this scenario it is quite difficult to place pending orders due to the uncertainty of the release, which could turn out with a disappointing result. In most cases if you are not patient and careful, your pending orders would be triggered before the actual time of the news release and this can be very disastrous if the expectation comes out against the triggered order.

Follow the steps below to set pending orders for this kind of scenario:

Step 1: Wait for at least 7 - 10 minutes before the news release to study the pulse of the market. This will help you to determine the immediate highest high and lower lows of the first five to ten candles or more.

Step 2: Place orders a little bit higher or lower than where price formed a resistance or support.

Step 3: Cautiously keep an eye on the fluctuation of the market in order to modify the position so as to avoid your orders getting triggered before the news release.

GBPUSD - Order Placement Prior to BOE Gov Carney's Speech - 9th Sept, 2014; 11:45am GMT +1. Click to Enlarge

GBPJPY - Order Placement Prior to BOE Gov Carney's Speech - 9th Sept, 2014; 11:45am GMT +1. Click to Enlarge

GBPCAD - Order Placement Prior to BOE Gov Carney's Speech - 9th Sept, 2014; 11:45am GMT +1. Click to Enlarge

How Much Order Should I Place?

This depends on your money management rules, broker spreads, and account size. You must understand that most brokers increase their spreads during news release. Not all brokers are news friendly so exercise great caution when selecting a broker if you are news trader. Personally in some very few cases i trade large lot sizes because of the certainty of the news release and market signs. However I do not advise you do the same. Ensure you do not trade more than 10% of your account size or free margin. It could be very dangerous.

TIP: To see the effects of lot sizes on news trading, carry out tests with Forex Simulation Tools.

Trade Management (Stop Loss, Take Profit, Reversals, Spikes, e.t.c.)

Ideally stop loss for Sell Stop pending orders should be placed beneath the recent support line or depending on the type of news they can be placed at a safer distance to avoid price fluctuations and and instant reversals that will erroneously hit the stop loss. Often times I have experienced instant price reversals within seconds or few minutes after the news release. This causes the stop loss to some pips above the resistance line as well.

Personally I do not have any fixed rule for Take Profit because I always use Trailing Stops to manage the trades. I recommend using the minimal trailing stop of 30 points & 50 points. 

INFO: An instant spike in a very high impact news release can move the market as far as 30 - 40 pips in few seconds, and then over 100 pips hours later. If you are trading the spike then stick to 20 - 30 pips maximum.

TIP: When a sharp spike occurs there are 80% chances of an instant reversal. In some cases the best time to enter a news trade is during the price reversal (i.e enter in the opposite direction of the reversal).

Trading Press Conference Speeches/Statements

Trading this type of news is quite difficult but very lucrative if you know how to interpret the statements of the speaker. Financial/Economic speeches or reports such as ECB President Speech/Press Conference, US FOMC Statements, BOJ Press Conference, BOE Governor's Speech, e.t.c usually come with very high impact due to the personalities involved, and the effects of their policy statements.

TIP: News speeches are interpreted into Hawkish or Dovish statements. Hawkish statements are aggressive. For example when the authority of a Federal Reserve Bank is bent on favouring an increase in interest rate or showing clear signs of imminent implementation of stimulus then that is a Hawkish Statement. The opposite of this is Dovish.

Since press conferences and speeches is more of an audible conversation you will need the following news services media to conveniently trade them:

1. News Wire Services: - Reuters, Associated Press, Agence France Presse, BNO News, Deutsche Presse-Agentur, All Headline News, United Press International, e.t.c
2. Satellite Cable Network Services (Business News): - CNBC, Bloomberg Television  Fox Business Network, MSNBC, e.t.c.
3. Radio: - RANSquawk.com, FXMMradio, e.t.c.

Personally i most often do not hook up with them except for CNBC Squawk on Television. I use either of the news trading methods to trade news speeches.

Documentation

It is a good practice to document your trades by leaving comments. This helps to analyze your performance on your trade journals. 

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Other Tips & Guidelines

1. Cancel or delete pending orders immediately if a conflicting release comes out. 
2. Do not setup your trades 20 minutes or more before the news release.
3. If you have an existing position on the currency you wish to trade the news, either adjust the stop loss or close the position before the news release.
4. In most cases orders cannot be manually modified or entered 1 - 2 minutes before the news release. In fact it is suicidal. Only automated (EA) systems have the capability to do so but not all the time due to platform hangs and server overloads.
5. Avoid using too tight stop loss.
6. Ensure that you have taken care of all physical distractions prior to trading the news.
7. Consult news expert pre-analysis and match it with your decisions before trading the news.

We've finally come to the conclusive part of this series. Feel free to leave your comments, inquiries and suggestions.

Happy Trading.