Forex and Trading the News

When one trades the forex, it is always important to look at the news items for the week. "Trading the news" is one mistake that newbies make on a regular basis. There are a great many trading systems and trading programs that are designed around the very principle of trading the volatile jolts that are produced by news items.

This is a fairly popular trading idea, since news comes out on a regular basis, and offers a lot of "opportunity" related to the data. Especially when a figure comes out which is a surprise to the fore casted data, or a big change from the previous month, quarter or year.

However, the big problem with trading the news is that many traders will try to "front-run" the news. That is, they will actually take a position before the news is released, and hope that it is the correct direction once the news is released.

I will be the first to confess, this "can" be an explosive means of profits. But it is a two edged sword. The same movement which gives big, fast profits, will also give big, fast losses. There are reasonable ways to trade the news, we will discuss some of them here. However, what we will recommend is using the news to END a trade, or to augment a trade that is already "on".

You may remember from previous reading that my system is based on doing everything opposite from what nearly everyone else recommends. Thus if everyone is creating systems based on making profits from the news, I am going to use it to take my profits.

But first, let's "go with the flow" for a couple of minutes. How can you make profits from the news? First, if we are expecting a big news announcement, such as GDP, or Non farm Payrolls. or an Interest Rate Change, most news pairs will begin to trend in the 2-3 days before the announcement. Depending on the forecast of news, the trend may be either up or down. The direction doesn't really matter. But since I will be looking at a shorter time frame, what I do is look to the daily chart, and see if the particular day I am trading on is up or down. The multi-day trend is not as important here.

So if the day is up, I will switch to the 5 minute chart, and buy every time the stochastics give me an oversold, and then a buy signal. (Please check the blog entries on stochastics for further information on that particular indicator.)

Since I will only trade with the trend, I will ALWAYS wait for a good over-sold signal and an upturn before entering a long trade on the buy side.

If the day is a "down" day, I will be looking for opportunities to sell short my selected currency. Again, I will wait for an overbought signal with a sell signal from the stochastics "turning down".

Be sure to keep a close stop, (the nearest swing high or swing low on the 5 min chart), and a trailing stop once the trade is profitable, to keep locking in profits on the way up. Remember, in this scenario, unless a reversal is underway, and the up trend is actually changing to become a downtrend, the oversold indicator is pretty reliable. But the over bought is not. Since it is an uptrend, it can remain over bought for a long time. While some traders will exit this trade as soon as the stochastic becomes over bought and crosses above 80, I will stay in longer. By using a trailing stop loss I can stay in a rising trend that may stay overbought for a long time before it pulls back.

That should do it for today, as this post is getting a bit "long in the tooth". Tomorrow we will come back and see how to trade the news after it is released.