OKE FOREX: how to trade news

Tuesday, 7 May 2013

Forex news trading: BOA rate decision

Fundamental events always cause a lot of volatility in foreign exchange markets. Interest rate decision events are above the rest as they are key currency drivers both short and long term. Markets often stall and fall into ranges days before these key releases and right after they come out huge moves start. Be aware of that. Of course, general public might be wrong regarding interpretations of these pieces of news, so it is crucial to follow smart money and not be led by emotions of greed and fear. Anyway, if you know how to take advantage of the news trading you can make nice cash in the long term. Let us look at how you could have traded BOA (Bank of Australia) rate decision today and try to speculate whether it will have long term impact or not.

Since I have moderated my trading news method slightly I did not trade the event. I did expect Australian dollar to rise after the release, but the Central Bank of Australia decided to surprise traders by cutting interest rates. Technically, yes you could see strong demand for British Pound, Euro and other currencies and strong supply of aussie all along. I guess that was the sign for technical traders that smart money knew what the BOA is up to and were buying into the event.

Although, I did not trade the event I want to quickly show you how you could have taken a trade (or trades) in gbp/aud and eur/aud made nice profits. I like these aussie crosses most as they are the most volatile and travel biggest distances when the breaks happen and big moves start. So, let us see how you could have taken a breakout trade in these two pairs.

First, eur/aud. Just before the news the pair was fluctuating in a small range of 1.2744-1.2777. This gave us an area for entry and exit. For a buy you would have placed a buy stop order a few pips above 1.2777 level with a stop below the range of 1.2744 (possibly 1.2740). That would be a stop of forty pips. You should have also placed a take profit target at previous high of 1.2885. I like exiting at previous highs when I buy and previous lows when I sell. So, the news came out and market exploded upwards and reached the target in 7 hours. A little bit over 100 pips of profit! I would say that is a very good risk reward ratio!

Now, if you wanted to place a sell order just before the news came you simply had to reverse the above mentioned order. You had to place a sell stop below 1.2744 level and stop loss order above 1.2777 level. Then define a take profit target that would have been around 1.2600 level, possibly a little bit higher (1.2610 as I like exiting ten pips before even number). Since the market went up you simply had to remove your sell stop when your buy order was opened and concentrate on your long trade.

Let us look at how you possibly could have traded gbp/aud pair during the event. Just before the news (3 hours) the pair was fluctuating in a range of 1.5189-1.5161. It means you should have placed a buy stop above the high of the range (1.5189) with a stop loss below the low of the range (1.5161). What about an exit? One way was to exit at previous high (1.5233). Another one was to exit at mid-point number of 1.5250. Of course, you could still keep the trade, but as you may see you would have lost most of your profit by now.

What if you wanted to place a sell order? Just reverse the process. Your sell stop order should have been at 1.5161 (a few pips below it) and your stop had to be a few pips above the high of the range at 1.5189 (possibly 1.5195). The most logical place to exit your trade would have been at an even number of 1.5100 (ten pips above that). When you saw that the news was bearish for aussie and your buy stop was triggered you simply had to remove the sell order and ride upwards with the market.

Looking at the price action now you can also see that these kind of trades can have very short term impact and market may reverse in a few hours, possibly in a few minutes. However, I still find news trading a good way to make extra money with my swing trading strategies.

Ok, I will finish on this happy note. Be sure to read related articles to learn more on my news trading method. I promise to expand on this in my future posts.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

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10 essential rules for trading Forex news profitably

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More on how to trade news

I promised to write on the topic how to select the best candidates for your trades in my last post. However, I see that I have a shortage of time and will not be able to finish it this week. Besides, I have written a few posts about it and do not want to repeat myself too often. So, this theme will be dealt with in my future post. Maybe I will collect my thoughts and post an article on that next Tuesday. Today I want to add a few thoughts on how you can trade Forex news releases. I wrote a lot on the topic too, so this will simply be an addition to what has been written. Be sure to read my post on the topic with specific rules for trading these macroeconomic events.

With time this strategy of mine has evolved and I use more freedom in trading the news. I often skip even those events that are of high importance if I do not like the technical structure of the currency that should be affected most by the upcoming release. I do it, because I see that not all events (even of high importance create volatility and move prices sharply).

So, with time I tried to incorporate more of technicals to this fundamental way of trading. I got better with this specific strategy and want to share just a few thoughts about it now.

My technical preferences

I like trading news when currency pairs are stuck in ranges or are consolidating. This creates a much bigger chance for a breakout. If you see a consolidation pattern or a narrow range of a week or more you can be sure that the market has lost momentum and direction and is waiting to be pushed by some fundamental factors. It often happens when news comes out.

I monitor around 27 pairs every day and know what state they are in at any given time. I wait for the prices to stall, lose direction and start ranging. I also like when those ranges are very small 150-250 pips in size. After staying in this pressed state currency pairs then explode one direction or another.

Some pairs are known for their natural tendency to stay for longer periods in ranges than others. Canadian dollar is one of them. If you look at the chart of cad/chf pair from the 1^st of March till 25^th of April (2013) you can clearly see how it loves these small ranges and you can also see how it leaves them with explosive moves. The areas that are marked by ellipses indicate moves that were pushed by some kind of news. That�s how Forex pairs leave their ranges or move sharply within them. You want to take advantage of that. Wait for important news from Canada and see what happens when it is released.

Another thing that I have noticed is that when pairs are in larger ranges they tend to move from the very top to the very bottom and then back. They might stop somewhere in between, but tendency is always to seek top or bottom. So, when prices reverse at the bottom they often move up even if the news that comes out is negative. It means market has caught tendency and is shaking off the news. That is a feature of a trending market.

Knowing this I often place my order only in one direction now. If you have already read my other article on forex news trading you know that I often place buy and sell stops on both ends of four hour chart or use other time frames to position myself for whatever direction market will take after news is released. I tend now to place order only in one direction: in the direction of a tendency that market is going on at the moment. I also place only buy stops when market is at the bottom of the range and sell stops when market is at the top of it.

One more thing that I want to see in the price action before the news is released is some bias: bearish or bullish. I am sure that the �smart money� is aware of the upcoming direction of a given security (or may even know what news will come) and it is taking position in advance by either accumulating or distributing. When I see that I know that market is positioned for the news in a specific way. Most often than not it does take that direction when news is released! This is another reason why I often (now) put only one order (in one direction) before the release comes. What happens if the market goes an opposite direction? I just skip the move and wait for another one. If you do serious analysis you will see that there usually is at least one big move (often more) during the week where you can make nice money. So, if I missed one move another move is around the corner. Do not worry about the past, think how you are going to use upcoming opportunities.

A good example illustrating my point would be GDP data from Great Britain today (25^th of April, 2013). If you look at eur/gbp pair price action starting from the 17^th of April when a high in an up swing was made. Right after that the pair started making lower highs and sort of descending triangle was formed. A few attempts of bulls to go up were met by strong bearish pressure and price went down till finally news came out and eur/gbp collapsed. Therefore, I positioned myself only for bearish eur/gbp price action and placed only one order which was a sell stop. And down the Euro went!

Ok, I want to stop there and leave other insights regarding news trading for the future. This topic is definitely not finished. Get ready for more. Have a nice weekend and see you soon.