Wednesday, August 11, 2010

An Easy Forex Trade: Straddling News Events

Lately I've been using a simple method for trading Forex that has been fairly profitable while also putting me back to 100% cash when everything is said and done. Basically, I've been waiting on news events and placing bets on both sides of them.

What I do first is check out the Forex Factory Calendar for upcoming news (you should set it to your time zone). Mostly I've been paying attention to news about the USD and the Euro, in particular the events noted with a red "impact" icon.

Depending on the currency I'm following, I'll pull up a USD/JPY or EUR/USD five minute chart about fifteen to twenty minutes ahead of time and look for a price range the pair has settled into. Usually before a major news release the pairs will range very tightly as traders stop trying to move the pairs significantly due to the uncertainty that results from a pending report.

When there is five minutes or less to go, I place limit orders above and below the price range, usually with ten pip trailing stops programmed in (my broker allows me to do this; I don't know if they all do). (I struck out that last bit because of a nasty surprise my broker just handed me: a trailing stop programmed to be placed when my trade executed was taken out instantly when the trade did execute. The reason is that my broker widened the price spread on the pair enormously right as the news I was following hit. I'm just going to stick with take profit orders instead. It just turned what should have been a 20 pip gain in a matter of seconds into an instant loss.) I place these fairly close to the action, but not too close since price can whip back and forth violently immediately after news hits the wires.

Normally a significant news event will push the price decisively in one direction or the other. If action heads up, my buy limit order is triggered and my trailing stop begins chasing the gains. If price plummets, my sell limit order is activated. All I do after that is cancel the order that wasn't triggered and let the one that was run its course.

This method doesn't always work as intended, and sometimes the gains are not very substantial. When things go wrong, because I have trailing stops automatically put in place the most that can be lost is twenty pips (normally it's just ten, but if price whips back and forth and both your buy and sell limit orders are triggered, you can lose up to twenty). (See above.) Often enough though the gains are substantial and are made very quickly. Depending on your needs, this can be a very effective way to trade.

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