NEWS TRADER

The news trader focuses on trading economic news releases. A great advantage is that
the strategy offers effective trading in a short period of time. News trades should be
considered seriously by those who cannot do forex trading on a full-time basis.

The market patterns relating to the news trade display three distance phases. First, the price patterns go into a sideways pattern. This is because there is hesitation
about the outcome. Then the news release occurs. A surprise result causes a sharp
move in one direction or the other through the formed support or resistance levels. After
the initial impulse, the market will sell off and try to retrace. It may succeed in returning
to the original sideways range, or simply go to a point of retracement and then pause and
resume the move in the direction of the break. These phases are part of every economic
news release responses by the market.
Tactics for News Trading
There are three essential tactics traders can use:
1. The Hedger. Put on a hedge trade by buying and selling the currency pair at the same
time right before the news. When the news is released, the trader gets out of the
losing position and stays with the winner.

2. The Bull Ride. Trade on the break of the news by entering the market in the direction
of the break and trying to ride out the move.
3. Post-News Retracement. Wait for the economic data to be released and allow the
market to move and complete its first wave. Once the move is over, the trader
will wait for a post-news Fibonacci retracement and enter the trade after this
retracement.
Each tactic has its advantages and disadvantages. Trading the news is a very efficient
way to trade forex because the trader knows in advance that the market will move. Let’s
look at the strategies in greater detail.
Riding the Bull or Bear—Anticipating Results (Most Aggressive Strategy)
The trader has an intuitive feeling (a hunch) for the outcome of the economic data. It is
not a wise strategy to put on a trade before an economic news announcement. But if the
trader has an informed point of view, putting on the trade before the news announcement
is an aggressive play that can be very profitable if correct. The key risk of being wrong
and having the price move against you is important to minimize.
Tactics for the aggressive strategy are as follows: About 15 minutes before the economic
data release, locate the 5-minute or 15-minute chart. Locate support and resistance
levels. Use the average true range (ATR) at the default setting of 14 periods. Place a market
order in the direction you desire. Place a stop loss order at 2 times the ATR. Should
you put on a limit order? In trading the news, the idea is to be ready for a big move But
we don’t know if a big move will come. So a small limit order targeting 10 to 15 pips
would be like eating cake with artificial sweeteners. If you’re going to trade the news,
focus on controlling the risk. The idea is to take a ride on the bull or bear, get on before
the break of the news, and then try to stay on to get the most out of the move. So I don’t
recommend a small limit. You might want to put on a larger limit of 75 pips.
Getting off the trade in a news event requires a high level of skills in identifying shifts
in sentiment. Renko charts are a powerful tool for this. Remember, riding a bull or bear
represents high risk. But if you want to try it out, do it with small lots on and test your
skills.
Trading on the Break (the Bull Ride) In this version of the news trade, the idea
is to get into the trade as soon as the data release breaks. The trader needs to have the
ticket ready to go and jump in. The risk here is of a whipsaw, where the price reverses.
This risk is not as high as people think because when the news breaks, there is maximum
energy and the market will respond. The risk of no surprise does occur and that results
in a small move, causing the risk of smaller losses than a whipsaw because essentially
the price doesn’t move beyond a previous range and there is little room for profits. But if you’re on the bull or bear trade and it is a big move, you have the same challenge of
when to get out. The advantage is that you are not immediately wrong.
Playing Both Sides at the Same Time (the Hedger) In this strategy, the
trader wants to participate in the news breakout but doesn’t want the risk of prediction
and the costs of waiting to decide direction. This strategy means you are buying
and selling the currency pair at the same time. As soon as the news breaks out, a decision
has to be made as to which side to get out of. Should it be the winning or the
losing side?
The first tactic is to get immediately out of the losing side. This may cost you 20 pips
or more on a strong move, but it also means you’re in on the winning side. So the price
for the ride depends on how quickly you can get out. Getting out of the loser first follows
the logic that at the break of the trade there is maximum momentum, and being in at this
point is, in fact, the best time to be in. This strategy works well when there is a big move.
Figure 14.12 shows a classic breakout in response to positive dollar nonfarm payroll
news release. The hedge strategy would have worked out, with the loss of about 20 pips
on buying the EURUSD, offset by a gain of up to 60 pips with buying the USDCHF. Few
traders could get the maximum gain out of this kind of move and would more probably
achieve a 15- to 25-pip move in about a 15-minute period.
Getting out of the winner first is a variation of this strategy. In other words, keep
the loser and get out of the winner because the first minute is when there is maximum
energy. Then manage the losing side. The idea is to wait for a retracement on
the loser. This strategy can backfire; if there is a small move on the news, both sides
can lose.
News trades can occur on any currency pair because all countries have key economic
data releases. There are many hedge combinations for trading news that affect
currency pairs. The same principle of going long and short at the same time applies (see
Table 14.2). Some forex firms now allow hedging in the same account. Other firms allow
the creation of a subaccount. For example, one can buy EURUSD in one account and
sell the EURUSD in the other account. But when this is not permitted, there are other
ways to employ a hedge strategy. If one is doing the EURUSD news and buying also the
USDCHF, there is a pip differential. The EURUSD moves $10 per pip (per $100,000), and
the USDCHF will vary. To obtain an actual hedge, one needs to rebalance the trade. For
example, if a trade were put on when the USDCHF was at 1.22, it would move $8.20 per
pip. So a trader doing a hedge would trade 10,000 for the EURUSD and 12,500 for the
USDCHF to balance out the move.
The trader will find that the implementation of these news trading strategies may
vary, based on the forex firm involved. One should test them out to determine if a great
deal of slippage occurs at the firm you are considering.


By ABE COFNAS