I would like to contribute with my approach for trading news items like NFP, CPI etc.
I trade this manually and it work quite well I must say. I have during my carrer as a Forex trader also traded on the spikes that occur during news, which I managed to do very well with. Unfortunately brokers tend to reduce the possibility to trade on the spikes by increasing the spread almost 5 times the normal. They also refuse to let trader in during the spikes or fill you at the top/bottom of the spike.
Well… I guess you all heared it before so that’s nothing new.
Even tough spike trading doesn’t work so well now days I still believe that one can take advantage of the market movements during the news.
So here’s my way of doing it. Hope you guys make money with it.
1. First of all you need to have a trigger for the news. You can’t trade every time. Only the times when you know historically that the price moves. Let’s say NFP is expected to 200k (meaning that 200k new jobs have been made since last month).
So what If the number comes out 205k? Is it a good trade? Is it worth to get into the market? No, it is not. The market will hardly move when the actual numbers are so close to the expected. That’s why you need a trigger. I use 50k – 70k (depending on markets sentiment) for the NFP as a trigger. Let’s calculate with a trigger of 50k. So if the actual numbers would be 250k or more I would be interested in entering the market. Or for that matter 50 worst… 150k or lower.
These triggers is something you will need to make up for your self depending on your own risk apetit. The higher trigger the safer trade. Look historically and make an excel sheet. It will help.
2. Now, let’s say our trigger get’s fulfilled. Here is how you do:
- Upload a 1 min chart of a currency pair that has the currency for which the release it made for. Meaning; If the release is Canadian CPI you of course need to trade something with CAD within it. GBP/JPY would be a bad choice to say at least. I would recommend USD/CAD.
- Now take a look at the picture. It is last weeks Canadian CPI. The price starts to spike and my triggers was met. What I did was that I draw a fib. Retracement from the close of the candle before the spike I call it pre-release price (In this case 12:59 CET) to the top of the spike.
- Put on one order at 50% fib. And set the SL 5 pips below the 100% fib. Retracement. In this case that meant a stop loss of 38 pips.
- At 74.6% fib. You set an order that is double the size of the first order. Yes, Martingale… but it works. SL 5 pips below the 100% fib retracement. In this case that meant a stop loss of 21 pips.
- In this trade my second order at 76.4% wasn’t hit. But let’s pretend it did just for the explanation.
- When/If the price once again reach the 0.0% fib. Retracement (the very top or bottom of the spike) we move the stop losses so that the sum of the two orders would end up with a breakeven if the price turns against us and takes our stop. That stop would be some were between the first order and the second order since the second order is double the first. At the picture this breakeven line is represented by the dashed green line at 1.0001. We now have a space of 41 pips for the price to move within.
- The risk. I only risk 5% per trade and to calculate that I use a excel sheet were I just enter my account balance, the top/bottom of the spike and the pre-release price. Then this excel sheet calculates the 50% fib. 76.4% fib. and what sizes I shall have at each level to risk only 5%. My excel sheet is in Swedish and I doubt that you guys can read Swedish so the best would be if you create one by yourself.
- The Reward. I always go for 1:2 in risk/reward. Meaning; since I risk 5% I want to earn 10%.
This is my approach and I use the 50% and 76.4% because I like it and it works for me. Perheps someone else want to go for other fib.-levels and if so that’s their choice to do so.
One thing that I do if that is a release that tends to move strong, like the CAD Employment, I have my Breakeven Gain at -0.382%. This is an extension of the fib. retracement. To see this level better I use to turn the Fib. retracement around and instead of drawing it from the pre-release price to the top I reveres it and draw it from the top to the pre-release. Then you would have the same level at 138.2% fib.
If there's any question just ask.
Regards / JoLi