Trading the news can be very profitable if you can correctly guess which way price is going to move. Price can often move 30 or 40 pips very quickly on big news releases, but knowing which way its going to move is very much a gamble, so most traders do not trade the news, as its just too risky, and you often get stopped out, as price moves one way, and then the other. Most traders have experienced this whipsaw effect, when price goes up then down very quickly, or down then up. So it seems no matter which way you trade, you always seem to get stopped out.
Now I look at the markets in a very different way to 95% of traders out there, and I can always see an opportunity in whatever the market throws at me. When you understand why the market moves as it does, you can profit from almost any trading scenario, and trading the news is probably one of the hardest things to make money from, if you do not understand what is happening to price. NowI am not going to go into the ins and outs of price action, and howI use it, but I would like to give you a simple but effective strategy for trading the news.
Now the problem with trading the news is stop losses. When most traders enter trades they set a stop loss. That stop loss could be anything from 10 pips to 30 pips or more if you are trading higher time frames. Now if you are trading the news on the 15 min time frame, and you set a stop loss how big should it be? 10 pips, 20 pips, 30 pips, more? Who knows? I certainly don’t, as I don’t know how big the move is going to be? So if you don’t know how big the move is going to be, how can you set a stop loss? You can set a stop loss above a recent high, or below a recent low, but a big whipsaw like the one in the screenshot will still wipe you out. So what do you do? How can you profit from a move like that? Well I am going to tell you right now.
If you think about what happens in a whipsaw, price moves up, stops out short traders, price moves down, stops out long traders. Now you know price is going up, to stop out shorts, and you know its going down to stop out longs, so this is what you can do. You can enter 2 trades, one long, one short, as close as you can to the the mid price of the move that leads up to the whipsaw. If you look a the screenshot, this would be the middle black line. You set a take profit on both trades of 10 to 15 pips to be safe. You can go for more if the news is big, and you are going to get a bigger whipsaw, an interest rate decision for example.
Now the important part is NOT to set a stop loss. Your take profit becomes the stop loss. Most traders will be trading this with a stop loss, you can trade it with a take profit instead of a stop loss. Price goes up, hits your take profit, price goes down hits your take profit. As price is hitting other traders stop losses, its hitting your take profits. But because you are trading without a stop loss, it does not matter which way price goes first, you are not going to get stopped out, you are only going to get your take profit hit.
Now there are a couple of important things you need to be aware of before you consider whether to use this type of strategy. The news release must be a high impact release, NFP, interest rate decision, FOMC etc. So you know the whipsaw is a high probability move. The market also has to be moving in a tight range before the news is released. This is VERY important. That way the stops are in easy reach of the whipsaw. If price has been going up, or going down before the release, then the whipsaw is less likely to happen. If you have the tight range that you need, you must enter as close to mid price as you can, so you are not exposed at the end of the range. If you are, your 10 or 15 pip take profit may not get hit in both directions.
Something else you can also consider to maximize your profit is to trade this strategy on multiple pairs. If the news is dollar related, you can trade all dollar pairs, if its euro related, you can trade all euro pairs etc etc. As long as you have the tight range you are looking for before the news release you can trade any pair. Trading multiple pairs will also spread your risk a little bit, just in case you do not get the whipsaw on all the pairs. As long as you get it on the majority you can still make plenty of pips, and your take profit should get hit one way or another. If you don’t get the whipsaw on every pair, just take off the other trade as close to breakeven as you can. If you are entering at mid price that should not be too hard to get.
A lot of my trading is based on market logic, and this strategy is a logical way you can trade this type of news release. I hope its been enjoyable reading, and made you think about the market a little differently. Making money from trading is all about understanding what is happening on the chart, and thinking outside of the box.
This article has been written for entertainment value only, and I do not make any recommendation to trade this strategy, or any other strategy. I do not know your trading experience, or your financial situation, and I am not qualified to give investment advice. Regards, Rob Taylor.
Guest post by professional Forex trader Rob Taylor, of http://www.tradeforexmakemoney.co.uk