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Chapter 25, Part II. Buying and Selling the News. Page 8

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Occasional news trading

    Commander in Pips: I hope you don’t mind that I’ve called that way of news trading with some sarcasm. Of course, this is not “occasional” trade, it’s intended one, but I call it like that just to appoint important moment that shows us the difference from a directional news trade. In this type of news trading we do not have any predefined view on news. We don’t care – will they show upward surprise or downward surprise. All that we are caring about is that they will show any surprise, and how large it will be – the larger surprise all the better. Our main task here is to pull the trigger in time and have detailed trading plan as for negative and for positive surprise in the data prior to release time.

    Since surprise is greater with greater data type, say NFP, such kind of “important” data quite suitable to trade them in “occasion” mode – in most cases they will show significant surprise.

    Pipruit: All right, all right – how to trade?​

    Commander in Pips: We will show you one of the possible ways and mention another one, but these strategies do not limit all possible ways of news trading. They are just applied more often than the others.

    First strategy – two-side trading (spot straddle trading)

    1. Look at price action just before the release time. Very often due to expectations of release, the market stands in the range. The tighter the range is - the stronger move could happen at breakout.

    2. Place two stop entry orders on breakout in different directions with target equals the range width (classical approach) or some other way (extensions, harmonic patterns etc). You may apply the harmonic number for a particular currency. For EUR/USD this number is approximately 20 pips.

    3. Place stop-loss order for buy entry 1 harmonic number lower than the upper border and for sell entry – 1 harmonic number higher than the lower border of the range.

    If your broker allows you – you may place OCO orders, if not – manage them manually.

    Ok, let’s say we’ve done all this stuff, and now at the eve of the most recent 7th of October NFP release. On chart #3 we see that some hours prior the release, the market stands in a 63 pips range. The upper border stands at 1.3458, the lower at 1.3395. So, we have to place our stop entry orders – one is above 1.3458, say at 1.3465-1.3470, and another one is below 1.3395 – at 1.3380. For each position we need to attach 1 harmonic number stop-loss order. So, for bullish positions, the stop loss will be at 1.3438, while for a bearish one it is at 1.3415. We will use here the classical approach to trading ranges – set target as the width of the range – 63 pips. Upward target will be at 1.3521 (63 pips), downward – 1.3332:

    Chart #3 | 30-min EUR/USD

    4. Wait news release moment:

    Chart #4 | 30-min EUR/USD

    Ok, what do you see?

    Pipruit: Wow! Look’s like the strategy has worked perfectly. We’ve entered at stop buy around 1.3465-1.3470, then retracement has come, but it has not triggered our stop-loss order and the market has run right to our target. But, sir, it has not quite reached it for 3 pips…​

    Commander in Pips: You’re right. We can’t hit the bull eye every time. Still, if you apply our rule, that we’ve appointed earlier to place targets not at precise level but slightly ahead of it – then everything is OK.
    By the way, do you know that this NFP was extremely bullish for USD? They have released more than 1.5 times better than expected…

    Pipruit: And why in this case we see such a strong upward move on the EUR/USD?​

    Commander in Pips: See the followed plunge? This is real reaction to the NFP release. The upward move is a closing of bearish positions by large traders who has expected to see a bear surprise… But you have made your money particularly on that move. Now, probably you understand why I’ve called this way of news trading as “occasional” – you just do not need to understand the fundamentals of the move – you need to be in right place at right time. That’s all! That is what all this stuff is about!

    Pipruit: I see… And what is the second strategy?

    Commander in Pips: Hold on, son – I’m not finished with this one. Let’s speak about scenarios of that trade. The current scenario that we’ve shown is most preferable for you:

    First scenario (most preferable):

    Entry stop has been triggered, stop-loss remains untouched, target has been hit;

    Second scenario – positive in general:

    First Entry stop has been triggered but later you were stopped out. Luckily second entry has been triggered also and opposite target has been reached. Although you’ve caught stop-loss on the first trade, profit from the second one has let you to remain with some profit still. Hence this is a rule – always make advance calculations so, that potential profit was at least 2 times higher than the stop-loss.

    Third scenario – totally negative:

    I think you already understand about what I’m speaking – you have been stopped out twice at both legs, or at least once, but the second entry order has not been triggered, or target has not been achieved. Here is most negative scenario for you. Although it could let you to stand at breakeven or even with small profit (if, say, second trade has not achieved the target, but still show some profit), most times you will get loss.

    This is very typical for unimportant news data or when surprise is quite shallow. That’s why, you may apply second strategy of unbiased news trading:
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 2, 2016
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