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If you are a trader who makes his Forex Analysis every day I’m sure that, at some point, you asked yourself:
“How can I profitably trade the news?”
You are perfectly aware that the currency market is full of events that influence the price level so you definitely don’t want to miss out on the latest Forex News.
How can you do that?
Knowing the upcoming events, however, is not enough because if you don’t have a solid strategy to take advantage of such announcements you will be caught by surprise and such lack of preparation will end up negatively affecting your Trading Account.
What should I do then?
Depending on your trading style, the risk that you want to take and your own personal rules that you might have defined, you need to have a solid strategy in order to take the most advantage out of Forex News.
In this article, we’ll describe 5 Strategies to Trade Forex News and analyse with real-case scenarios how you can integrate them into your Trading Activity, be it Day Trading or Swing Trading.
Let’s begin with the first one: Position Trading.
1. Position Trading
Like the term itself suggests, position trading means to be already well positioned before the news is released.
In this case, you are taking away all the stress and frenzy that might arise when an announcement comes out and you are protecting yourself from possible impulsive decisions that might end up being violations of your Trading Setup.
Even if it might sound a risky strategy, it is actually one of the most protective because not only you can plan your trade in advance, but also because you set a fixed risk and a fixed target, then it’s like being on autopilot.
Let’s now see how Position Trading was a good strategy for the Brexit Vote on June 23, 2016.
Brexit Vote on GBPUSD
The chart above shows the pair GBPUSD on a 1-hour timeframe in the days before and immediately after the Brexit Vote. The only indicator that is used to analyse the Price Action and plan the trade is the Levels and Zones which is one of the most popular indicators for TradingView.
As you can see from the chart, in the days leading to the vote, the pair is on a rather strong uptrend, however, 8 hours before the vote result came out, a new resistance forms on the chart (red horizontal line) and that is the trigger to plan our trade to sell GBPUSD.
The Stop Loss level (red rectangle) is above the Buy Area determined by the Levels and Zones (green area behind the red rectangle). Our target, instead, is at least a retest of the support at 1.40444.
What happens when the vote result started leaking is that the price rises on the speculation that the Brexit was rejected but then, suddenly, it changes direction and makes a significant drop within a few hours.
The trade earned us 841.4 pips and 5 times the risk in just a few hours. For instance, risking $1000 would have added $5000 dollars to your trading account within hours. If then, you would have moved down your breakeven level, maybe with a trailing stop, you could have earned an even bigger profit all the way down for about 1500 pips and 9 times the initial risk, hence $9000!
With just one indicator and well ahead of the news release, with Position Trading, it was possible to plan the trade and then sit down and relax until the target was reached.
2. Reaction Trading
Some traders don’t trade unless the news is actually released, and it totally makes sense because we all know that Markets can do whatever they want whenever they want. Having the opportunity to see a certain reaction before even trading, could represent a significant advantage.
But there’s a catch.
You have to be as quick as possible to open your trade after the news is out in order to catch the reaction early and stay in as long as it lasts. You must be quick because the movement that derives from the announcement could be very impulsive and so every second matters in order to maximise your profit.
The following example well explains this strategy.
ECB Minimum Bid Rate and Press Conference on EURUSD
The chart represents the EURUSD on a 15-minutes timeframe during an ECB Minimum Bid Rate release and the following Press Conference. The only indicator that is added to this chart is the Breakout Pivotal Bars because we want to identify breakout opportunities.
The very moment the Minimum Bid Rate comes out, the price breaks down and we enter our short trade placing the Stop Loss just above the previous consolidation.
In this case, the only moment we really have to catch the reaction to the ECB release is the very moment it gets out. Once we enter there, we can then ride the trend all the way down. Waiting any longer would mean minimising the profit and maximising the risk, hence opening a trade later than the very moment the news is out would not be justified.
In 24 hours we have a 4.5 times return on our initial risk (total profit: 209.6 pips) and the only real opportunity to enter this trade was the very moment the ECB data came out. All the other opportunities were either too risky (at the very left of the chart) or less profitable (several hours after the data release).
3. Analysis Trading
As we’ve seen in the previous paragraphs, Forex News could lead to very quick impulsive movements and as money can be earned quickly, it can also be lost even more quickly.
If there are traders who like to be positioned before news releases and others that, instead, prefer to react as quickly as possible just after the news comes out, other traders prefer to wait and analyse the reaction to the announcement.
Don’t I risk to be late?
Not necessarily. How many times we hear the words: “Don’t look at the data, look at the reaction to that data“. Basically, data are just numbers and traders (human beings!) have expectations so they react depending on whether data matches their expectations or not.
For instance, we might have some bad data being released but if the Market expected such data to be even worst the reaction will be actually positive.
In many cases, then, it is wiser to let all the frenzy fade away after the news is released. In other words, take the time to analyse the reaction and then open a position.
Let’s see a real-case example. What follows is a USDJPY 1-hour chart showing the price action of a FOMC Meeting Minutes release.
FOMC Meeting Minutes on USDJPY
As soon as the FOMC statement is released we have an initial negative reaction with a quite significant drop, however, by the end of the hour, the candle even turns positive. The rejection of the downward attempt (long pin candle) and the positive close of that candle, shifted the Market towards a possible upward movement. In fact, right the next candle, we see price moving even higher but, unfortunately, it was just a bull trap. Within a few hours, it becomes clear that the pair couldn’t go any higher and once the candles turned red (painted by the Breakout Pivotal Bars) it was possible to open a short trade.
This example demonstrates that waiting an adequate amount of time after a news release is a valid strategy. Maybe, sometimes, the wait will make you miss some opportunities but in many other cases, it will definitely save you from being fooled by the initial Market reaction.
4. Trading as usual
A Forex Calendar is not always the best friend of a Currency Trader. In fact, many traders barely even look at it and so could you.
Yes! Not that you can entirely ignore major events but you can definitely stop looking at the calendar every hour or even every day.
How is it possible?
If you are a Technical Trader you must have a backtested strategy, right? Well, during your backtest you were actually considering price movements influenced by news releases and any other sort of event. So, if your strategy works, it means that you can simply ignore any future announcement and rather concentrate on the technical optimisation of your setup!
Basically, a pure technical trader considers news as any other factor being discounted in the price. So, every time a Technical Trader sees a valid setup, he just takes it regardless of something coming out in the near future or being just released (e.g., NFP, FOMC, ECB, … ).
This is why it is so crucial to have a good backtested strategy – whatever happens, you know it is going to be ok over the long term.
The only exception in which even a pure Technical Trader should consider switching to a different strategy is when potentially highly impacting events are due (e.g., Brexit Vote, …). That’s because there might be extraordinary high volatility, massively impacting the general stability of the Markets.
5. Why Trading?
The question is rather provocative but still true.
It is not unusual that many Currency Traders don’t trade when major Forex News are due.
It might sound counterintuitive because they are missing out on opportunities but it is a very interesting strategy indeed.
In the previous paragraphs, we analysed four different strategies in order to exploit Forex News at best. However, they all had one thing in common, which is the risk to lose money.
Every time you are in the Market you are accepting such risk but at the same time, you try to minimise it. This is exactly what Traders who don’t trade news do.
From the extensive description of the previous four strategies we understood that, in many cases, Forex News bring a much more significant risk than any other regular moment in the Markets. That’s because the reaction to announcements has a factor of unpredictability which is intricate in it.
What these traders do, then, is to avoid such unpredictability and don’t take any risk at all.
Yes, but they are not making money…
True. But they are not losing money either. Essentially, by not risking to lose money, they are in fact, making money. They just respect a very basic rule in trading: “To make money, don’t lose money!“.
Maybe they won’t spend the entire day sleeping on a bench in the park, but hey, spending a day off the charts could be a good option sometimes.