Trading forex news releases requires a tremendous amount of composure, preparation and a well-defined strategy. Without these qualities, traders can easily get swept up in all the excitement of a fast-moving market to their detriment. This article provides useful strategies on how to trade forex news during a major news release.
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Forex News Trading Strategies
There are two common strategies for trading forex at the news release:
- Initial Spike Fade strategy
- News Straddle strategy
Each one provides a robust plan for traders to follow, depending on the market environment observed at the time of the release, and how best to approach that particular market.
Before reading further it is essential that you have a good grasp on the basics of news trading. If you are new to trading or simply require a refresher, take a look at our introduction on how to trade forex news.
1. Initial Spike Fade Strategy
This strategy looks to capitalize on an overreaction in the market over the short term by fading the initial move. This strategy suits reversal traders, scalpers and day traders due to fast moving and erratic pricing that often follows a major news release.
Overreactions and subsequent reversals are seen fairly regularly in the forex market as large institutions add to the increased volatility of the initial move. The market as a whole, often spikes as an overreaction and subsequently push price back toward pre-release levels.
The shortfall associated with this strategy is that the initial spike may turn out to be the start of a prolonged move in the direction of the initial spike. This underscores the importance of using well-defined stops to limit downside risk and get you out of a bad trade quickly.
How to implement initial spike fade strategy:
- Select the relevant currency pair: Ensure the major news event corresponds to the desired currency pair to trade, i.e. Non-Farm Payrolls will affect USD crosses.
- Switch to a five-minute chart: After selecting the desired market, switch to a 5-minute chart just before the news release.
- Observe the close of the first five-minute candle: The first five-minute candle is usually quite large. When price approaches either the spike high or the spike low, fade the move by trading in the opposite direction.
- Stops and limits: Stops can be placed 15 pips above the high for a short trade or 15 pips below the low for a long trade. Targets can be set at two or three times the distance of the stop.
2. News Straddle Strategy
The news straddle strategy is perfect for traders expecting a huge surge in volatility but are unsure of the direction. This strategy lends its name from a typical straddle strategy in the world of options trading as it uses the same core strategy – to capitalize on an increase in volatility when direction is uncertain.
The disadvantage of the news straddle approach surfaces when price breaks support or resistance only to reverse soon thereafter. Similarly, price can trigger the entry order and move toward your target only to reverse until a stop it hit.
This strategy can be implemented using the following steps:
- Establish a range with support and resistance.
- Set two orders to open: Set a working order/ entry order to open a long trade if price breaks above resistance and one to go short if price trades below support.
- Remove remaining order after confirming direction: The market has the potential to breakout of the range and once this happens, the one entry order will be triggered, and a trade will be opened. Immediately remove the entry order that was not triggered.
- Stops and limits: A tight stop can be placed at the recent range low when going long and recent high when going short. Limits can be placed in line with a positive risk to reward ratio.
Trading the News During the Release: Conclusion
Trading forex news at the news release has the potential to overwhelm traders with increased volatility in a short period of time. However, through the adoption of a solid strategy, traders can approach these volatile periods with greater confidence and mitigate risk of a runaway market through the use of guaranteed stops (where available).
Take a look at what our in-house analysts have forecasted as the top trading opportunities for the year.
Trading Forex News Releases FAQs
How can I tell which direction the market will trade after at the release?
Forecasting the economic news release is one thing, predicting how traders will react to the news release is quite difficult. When estimations are unsurprising or more or less similar to the previous recorded number, the market tends to digest this information and it is reflected in the lead up to the release. However, there is no guarantee that the market direction/trend will be maintained even if the news comes out exactly as was estimated. This is because different market participants can draw different conclusions that will influence their trades.
Someone may consider data that prints in line with expectations as a bad thing and someone else may view it as a good thing. The bottom line is that traders need to have a strategy in place with predetermined risk parameters.