To make profits from news trading - how ever you look at it - is a difficult task. Here are the four possible trading outcomes you have to accept:
(1) A predetermined loss amount (by using guaranteed stop order)
(2) A higher loss amount (invalid or no stop order due to price gapping) - Worst case scenario
(3) A predetermined win amount (by using fixed target limit level) - Best case scenario
(4) A smaller win amount (by using trailing stop order)
Interestingly, it is also possible to have different trading outcomes from just one news event, simply depending on which market your choose to enter. Let use today's US non-farm payrolls as a case study.
An Example
I was bearish on the USD dollar before the big news and was expecting a lower job report. I was holding three short USD positions into the news event with predetermined target and loss levels. The news came out in favour of my positions first, but the US dollar rebounded strongly after the initial retreat. It was a classic dollar bear trap scenario.
Here are my three different outcomes:
Short USD/JPY yielded +85 pips (scenario 3 above)
Short USD/CAD stopped out -40 pips (scenario 1)
Long AUD/USD stopped out +21 pips (scenario 4)
Must Use Stops
Setting the right stop levels is an imprecise science and involves a lot of trial and error. But it is a must when come to news trading. I would suggest using a reward-to-risk ratio of 2 or better when considering the stop levels. You should also expect a widened spread seconds before as well as after the news releases. Make sure to check with your retail forex broker.
In summary, there are many factors to consider when dealing with economic news releases - part number crunching, part guesswork, part experience. Especially in the forex market, the more you know, the less chance you will mess up. Therefore, give it lots of thought and know your reasoning behind your each move. It is also important to keep track your win-loss rate before deciding to continue on.
(1) A predetermined loss amount (by using guaranteed stop order)
(2) A higher loss amount (invalid or no stop order due to price gapping) - Worst case scenario
(3) A predetermined win amount (by using fixed target limit level) - Best case scenario
(4) A smaller win amount (by using trailing stop order)
Interestingly, it is also possible to have different trading outcomes from just one news event, simply depending on which market your choose to enter. Let use today's US non-farm payrolls as a case study.
An Example
I was bearish on the USD dollar before the big news and was expecting a lower job report. I was holding three short USD positions into the news event with predetermined target and loss levels. The news came out in favour of my positions first, but the US dollar rebounded strongly after the initial retreat. It was a classic dollar bear trap scenario.
Here are my three different outcomes:
Short USD/JPY yielded +85 pips (scenario 3 above)
Short USD/CAD stopped out -40 pips (scenario 1)
Long AUD/USD stopped out +21 pips (scenario 4)
Must Use Stops
Setting the right stop levels is an imprecise science and involves a lot of trial and error. But it is a must when come to news trading. I would suggest using a reward-to-risk ratio of 2 or better when considering the stop levels. You should also expect a widened spread seconds before as well as after the news releases. Make sure to check with your retail forex broker.
In summary, there are many factors to consider when dealing with economic news releases - part number crunching, part guesswork, part experience. Especially in the forex market, the more you know, the less chance you will mess up. Therefore, give it lots of thought and know your reasoning behind your each move. It is also important to keep track your win-loss rate before deciding to continue on.
No comments:
Post a Comment