News Trading Methods

Straddles

Straddles are really easy to set up and require very little thinking, but it is probably the riskiest method of trading the news. To set up a straddle, you basically put a limit order to go long a few pips above the market before a news report, and simultaneously put in a limit order to go short a few pips below the market. If the report creates enough volatility your orders will be automatically triggered, and your stops and profit levels will also be automatically executed if hit. Simple as that.

Again, it sounds easy, but be very cautious with this method in that both long and short orders can be triggered, and if profit targets and stops are set incorrectly, you can be stopped out for maximum loss on both orders. Also, you run the inherent risks of slippage.

"Trading the Numbers"

This seems to be a more preferred method by many, in that you determine whether or not the news report is worth trading at all – a lot less risky than straddles.

First, you must determine the significance of the news report being released. Not every news report release is tradable; either it wouldn’t cause a stir in the market, or that the initial volatility would be so crazy that it would be too dangerous to enter a trade.

Ask yourself what kind of environment the market has been in recently. In other words, what has been affecting the market lately?

For example, maybe the Federal Reserve has been concerned with inflation. In this scenario, any inflation-related data (consumer price index, hints on future monetary policy) would be closely watched by the Fed – and what the Fed is watching, traders are watching. Any news reports of this level may be great opportunities to trade, as long as you are conscious of the risks.

The second step is to watch the news release and see if the report or economic number being released is inline with what the market is expecting. Obviously, if the report or number was a good one and/or a good surprise for a country, then you would go long its currency, and vice versa.

For example, in the next U.S. employment report, the market was expecting 200K new jobs, and the number came out at 300K. It’s a surprise to the upside, and more jobs signal strength and growth in the U.S. You would go long as soon as the report is released and hope to catch a portion of the move. If the report came in pretty much as expected, then there would be no trade.

Trade at Your Own Risk!

Before I pursue anything, I like to know exactly what I’m getting into. The same especially goes for trading. We’ve heard the benefits and why we should “trade the news,” but more importantly we should know the risks.

Slippage

Market volatility can increase geometrically during news releases, which means the price can move as little as 5 pips to 20 pips (or even 50 pips and more during major news releases) in the matter of seconds. If you try to get your order filled during this type of volatility, you will probably get filled at a much different price than you anticipated. This is especially risky with limit entry orders.

For example, I once placed an order with a broker (one that guaranteed fixed spreads, but not execution) 15 minutes before a major news release on EUR/USD. Right before the release, the market was at 1.2320. I set my limit order to go long at 1.2360, with a profit level of 1.2383. The news came out bad for the U.S. dollar, which caused the market to shoot up 80 pips as soon as it was released. My long order was triggered, but unfortunately, I got filled in at 1.2390 – 30 pips above my limit price!! After the market settled for a bit, my profit target price was executed at a loss because it was set below the price at which I got filled in. Fortunately, it was only a 7 pips loss, but it was a costly lesson learned.

Order Freeze

Some brokers prevent limit and market orders right before a major news release (some up to 30 minutes to an hour beforehand). This usually occurs with brokers who guarantee fixed spreads.The reason your trading platform “locks up” is not because the platform “crashed”, it’s because the spread is too wide and if the brokers offered them with their fixed spreads, they would lose money.

Volatility/ Whipsaws

During major news reports and economic releases the market can swing 20 to 50 pips in a second! News volatility can be very dangerous, even for experienced traders. You may catch the strong initial move, but like so many times in these situations, it can turn against you into a losing trade just as fast.

Spreads

Some brokers may guarantee execution but do not guarantee spreads, and during news events you’ll see spreads widen dramatically (I’ve seen a 3-pip spread turn into a 14-pip spread during a report). If you like to take small profits like 5 to 10 pips, this will hurt your chances of profitability and possibly keep you in a potentially losing trade.

Tradeable Reports

With all of these countries to choose from, there are easily five to ten economic news releases almost every day! Also, the great thing about focusing on news releases is that they are scheduled in advance, so you know exactly when you can schedule your trading hours.

You may be thinking that five to ten news releases per day may be a lot to keep up with, but you really do not have to pay attention to every single report – you can pick and choose. There are a few key reports, most of which come out every month, that produce a significant amount of pip movement.

For this lesson, we will focus on U.S. news and economic reports, mostly because the U.S. dollar is involved in a majority of currency trades, and therefore tends to have the most significant impact on the currency markets. Here is a list of some of the top U.S. market moving reports:

• Employment Growth
• Interest Rate decisions
• Trade Balance
• Gross Domestic Product
• Retail Sales
• Durable Goods
• Inflation reports (Consumer Price Index and Producer Price Index)
• Foreign Purchases report (TIC Data)

Every country has a set of major reports similar to this list and can be as potentially volatile. Again, since these reports are scheduled in advance there are plenty of websites on the Internet with schedules and potential volatility rankings.

Things to Know When Trading News Reports

Now that we know “how” and “when” you can trade news reports, there are a few key concepts you should know before placing your first news trade.

• While the actual news number or report is essential to the long-term movement of a currency pair, in the short-term the difference between the market expectations and the actual release is what causes potential breakout opportunities. This means economic numbers and reports that come out as the market expected generally do not cause a strong market reaction.
• The quieter the market is before a news release, the more the market is poised for a significant move. Think about it: In a quiet market, less and less traders are buying and selling, possibly waiting for some sort of catalyst (like a news report maybe?). When this “catalyst” takes place, all of these traders waiting on the sidelines jump in at the same time causing a huge move in the market. So, the more traders wait (the quieter the market), the more will jump in after a news report (huge pips and a new Ferrari, right?).
• Depending on the significance of the economic report, and the amount of deviation of the actual to the forecasted number, news breakout opportunities are generally short-lived and may last for only a few minutes or even a few seconds. Trading news releases may be better suited for scalpers and day traders.

Trading the News

Trading the news is becoming a popular technique to trade the forex markets … and why shouldn’t it be? Time and time again you see currency pairs move 50 to 100 pips within minutes or even seconds after a major news release. When you see that, I bet you’re thinking, “50 to 100 pips!? That’s easy money!” Maybe it is, and maybe it isn’t. It all depends on how prepared you are to trade a news release.

The goal of this lesson isn’t to give you a specific “Trading the News” strategy. The goal is to point you in the right direction and show some of the risks involved with trading these events, because here at BabyPips.com, we want to help you help yourself in developing your own methods that fit YOU best.

Why Trade the News?

Trading news releases can be a significant tool in your trading arsenal. If you want, it can be your only weapon altogether. Economic news reports often spur strong short-term moves in the market, which are great trading opportunities for breakout traders. And with the forex being open 24 hours a day and a true worldwide market, there are plenty of opportunities almost every trading day to catch market volatility (aka a lot of pips!) kicked off by an economic news report.

hich Pairs Should I Trade?

Here is a list of the top currencies and countries in which you should focus on for news trading:

Symbol	Country	Currency	Nickname
USD	United States	Dollar	Buck
EUR	European Union	Euro	Fiber
JPY	Japan	Yen	Yen
GBP	Great Britain	Pound	Cable
CHF	Switzerland	Franc	Swissy
CAD	Canada	Dollar	Loonie
AUD	Australia	Dollar	Aussie
NZD	New Zealand	Dollar	Kiwi

Now, there are plenty more currencies available to trade, but this list is based on the size of each country’s economy, frequency of news releases and the trading liquidity of their currency.

When are News Releases uh Released?

The list below displays the times when the most important economic data are released for each of the countries. Make sure you know them or go broke.

Symbol	Country	Time (GMT)
USD	United States	13:30 - 15:00
EUR	Germany	07:00 - 11:00
EUR	France	07:45 - 09:00
EUR	Italy	08:45 - 10:00
JPY	Japan	23:50 - 04:30
GBP	Great Britain	07:00 - 09:30
CHF	Switzerland	06:45 - 10:30
CAD	Canada	12:00 - 13:30
AUD	Australia	22:30 - 00:30
NZD	New Zealand	21:45 - 02:00

Pigs Make Money, Hogs Get Slaughtered

IG = A pig is a well rounded animal who is happy with the life style it has created for itself. A pig understands the importance of “money management”, “goal setting”, and how to "following the system" for it is the system that has given the pig its profits.

HOG = A hog looks like a pig, however, is so very different. A hog runs over all rules to be the first in line. A hog has no concept of the system or money management therefore fails time and time again. The only thing a hog really accomplishes is being the first one to lose.........or should I say, the first one in line to be slaughtered. yummmmmm, I do love bacon.

Forex trading is awesome. The skills you are about to learn are essential to long term successful trading and when these skills are combined with our complete trading system you will then have a clear advantage over the average trader and the opportunity to change your life forever as it has done mine. You, have the potential, right now, to create great wealth through the Forex market, HOWEVER, there are some very specific situations that you need to be aware of when you trade, as well as, very special personal traits that are needed to become profitable. Please read the following information slowly, and then, read it again. THEN – READ IT AGAIN!!! You may even want to read it weekly as your mind-set must be “IN THE ZONE” to become profitable. DO NOT take any of the following information for granted.

When you put your hard earned cash in a trade, it is difficult not to get emotional. Beginning traders might experience a roller-coaster ride of emotions, feeling glee after a good streak of trades and disappointed after a group of losses. To become a profitable trader you must control your emotions and not let your emotions control you.

Quote from a young trader named Dustin from the e-newsletter Innerworth:
"To make me realize whether or not I was emotional, I had to go through hard times with trading. I think it's crazy how the market can take you from a high to a low, and back to a high and then back to a low. You think you've got it all worked out, and then six months later, you're thinking of finding a new job. What I realized is that when I'm doing okay, I'm totally unemotional when it comes to trading, like when a new trading strategy has been working. I just sit there and have a good time. Even if I have a bad trade, it doesn't bother me. But when I was having trouble, like earlier this year and late last year, when I was only able to keep my head barely above water, it was really frustrating. I guess that's when you learn more about how emotional you are when it comes to the market. I'm not the kind of guy who is going to throw my keyboard around, but it definitely has a psychological impact on the rest of my day."

Thinking, "losses are to be expected" can help you become a better trader. Just thinking to yourself about taking losses in stride can be quite consoling. By expecting losses from time to time, you are being realistic with yourself. We are all in the same boat, so why beat yourself up over a loss? Our emotions can be overpowering when we are caught off guard. However, if we go in fully expecting the possibility of failure, we can mobilize our psychological resources more quickly and fight back immediately before our mood worsens. That doesn't mean going into a trade pessimistically expecting it to be a failure. What it does mean is preparing to take a loss. Before the trading day begins, you should mentally rehearse how you'll deal with the loss. You might think, "I'm not going to be caught off guard. The trade may go wrong, and when it does, I'm going to just close it out and move on". Through a combination of monitoring your internal dialog and mentally visualizing what can go wrong, you can get ready to take a loss, so that when it happens, it won't hurt so bad and knock you off balance.

Part 6 to follow in a few days. If you would like to be notified when it is posted email me at steve@mydu.org

Thanks for your time,

Chart Of The Day - 1/03/2008 - EUR/USD

1/03/2008 – EUR/USD – A close look at the EUR/USD daily chart (as displayed) shows that an inverted head-and-shoulders pattern has just formed (the neckline of which is represented on the chart by the yellow line labeled “1”). This follows closely on the heels of a right-side-up head-and-shoulders pattern (the neckline of which is represented on the chart by the yellow line labeled “2”) that formed and completed late last year. In fact, these two patterns actually share a shoulder. At this writing, price action is toying with the inverted neckline at “1”. It should be kept in mind that a head-and-shoulders pattern cannot be considered complete unless there is actually a decisive break of the neckline. Therefore, price is currently at a critical support/resistance juncture. A decisive breakout above the neckline should target strong resistance at the historical high of around 1.4960. If, however, the current neckline resistance holds, and price turns back down, the first major support on the downside resides around the most recent shoulder level in the 1.4600 region. This level, incidentally, also coincides with the 23.6% Fibonacci retracement level (the low-to-high span being measured from the low on 8/16/2007 to the historical high on 11/23/2007). Further below this, additional major support resides at the inverted head level of around 1.4300.

James Chen
Chief Technical Analyst
FX Solutions

IMPORTANT NOTICE: These comments are for information purposes only. The information contained on this document does not constitute a solicitation to buy or sell by FX Solutions, LLC., and/or its affiliates, and is not to be available to individuals in a jurisdiction where such availability would be contrary to local regulation or law. Opinions, market data, and recommendations are subject to change at any time. Forex trading involves substantial risk of loss and is not suitable for all investors.

(Chart courtesy of FX Solutions' FX AccuCharts. Price on 1st pane, Slow Stochastics on 2nd pane; uptrend lines in green; horizontal support/resistance lines in yellow; 200-period simple moving average in light blue.)

Attached Thumbnails

NFP And The Markets-SPECIAL ALERT

The markets calmed down a bit on Thursday after the Commerce Department said new factory orders increased 1.5 per cent in November, much greater than the expected 0.4 percent rise and the ADP reported the economy created 40,000 new jobs in December. Some traders had feared the number would be negative. ADP also revised down its October-November payroll growth to 173,000 from the initially reported 189,000.

Weekly jobless claims fell 21,000 to 336,000, below an expected level of 345,000 and the four-week moving average decreased slightly. Claims fell from an upwardly revised 357,000 the prior week, which was a high for 2007 and the highest level since October 2005. For the week ending December 22, the number of people continuing to receive unemployment insurance increased 46,000 to 2.761M, the highest level since October 2005. Economists were expecting 2.675M.

The Equity/Carry Trade markets are likely to be extremely sensitive to the NFP. The expectations are that slump in the housing sector may continue thru 2008-therefore jobs will be the key indicator of whether the US consumer will continue to spend at a level which will prevent the economy from falling into recession. The problem is that job creation is been weakening over a long period of time. For example, average monthly job creation in 20007 was down over 60 percent from 2006. As far as I'm concerned, the economy will go into recession by Q2, however, that's not the current market expectation.

On to the mechanics of the trade. The first thing you need to do is to get all the numbers-headline and revision. When you get the revision numbers, you need to do the math and see if jobs were added or subtracted from the covered period. The markets do tend to trade more off the revised numbers then the headline, but they can be put together for an even better trade.

If the headline beats the consensus and the prior period is revised up that will be very supportive for the Equity/Carry Trade markets, which means the Yen will depreciate while all of the JPY crosses appreciate. The opposite is equally true as well. Should the headline number disappoint while the prior period is revised down, the Equity/Carry Trade markets will take a big hit and could go into a downward trend that lasts for days. The GBP/JPY carry trade is the most volatile JPY cross and tends to move the most. NZD/JPY tends to be the least volatile pair of the JPY crosses.

The above two scenarios are the best-case trade opportunities. Less certain is what happens with a mixed set of numbers, although a downward revision to previous periods has usually been taken as a net-negative. In the case where a mixed set of numbers is released, you'll want another way to gauge market reaction and you can do that by observing what happens in the futures markets after the report is released. A strong positive reaction is seen when S&P futures rise and 10 year bond futures fall, while a strong negative is just the opposite. The key here is that the JPY crosses move with the S&P 500 and inversely with bonds. And if we have data that creates a market consensus there (either good or bad), we know what will happen with the carry trade pairs as well.

While the ADP report has been not been accurate as far as the numbers are concerned, they have been pretty good with the overall direction. Their headline number disappointed and their prior number was revised down in this report and I think it highly likely to see the same result in the NFP tomorrow.

And obviously, you'll want to look at the services ISM as well. The easiest trades are always when a strong consensus exists and if the NFP and ISM both disappoint, that will be the time to take an aggressive short position. The only ways to stop the markets from falling heavily at that point are two things:

1. The Plunge Protection Team Pulls The Plug

2. Bernanke cranks up the presses and announces the Fed is "injecting" a tax-free $1,000,000.00 into everyone's bank account.

It does appear the The Presidents Working Group For Financial Markets a.k.a. the PPT HAS indeed been hard at work. Obviously, traders will need to keep an ear out for any information that's released in the press conference tomorrow.

SPECIAL ALERT

Jan. 3 (Bloomberg) -- President George W. Bush will meet with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke tomorrow as he considers whether to announce a new economic stimulus package amid slowing growth.

Bush will speak to reporters tomorrow after a 1 p.m. meeting at the White House with members of the President's Working Group on Financial Markets, press secretary Dana Perino said today.

Full Article: http://www.bloomberg.com/apps/news?p...CTc&refer=home

Thanks for reading my post and please use the box to vote. If you'd like to try trading the NFP and other economic news with me, you can join my room for just ten bucks a week. Join on the blog: thenewstraderfx.blogspot.com

Conbtact newstraderfx@yahoo.com with any questions. Good Luck!!
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"I'm not an economic forecaster. I'm a consumer of economic forecasts."