How to Generate Profits From Forex News Announcements
Words carry a lot of power. Nations have started and crumbled because of the strength wielded in a pen. There are many opportunities in today's world for words to have a far-reaching impact on nations or individuals.
Sometimes, the words that people hear are not the ones they should be listening to. This is especially true in foreign currency exchange; with the massive number of experts, analysts, and educators out there. As traders, we need to learn to look past the rhetoric and claims to find the strands of truth that will help us profit in the markets.
The USD Federal Open Market Committee Rate Decision took place on October 29th, 2014. A quick look around the internet and news showed many different opinions on how the rate decision would go down and what the effect would be. Analysts attempted to get into the mind of Janet Yellen; the first woman to Chair the Board of Governors of the Federal Reserve System and successor to Ben Bernanke. The goal is to predict what road Yellen will ultimately guide monetary policy down to build profit or cut losses.
There is a significant problem with these guesstimates. No matter how much past precedence there is; there is no guarantee that the past will repeat itself. Good analysts understand this and do not attempt to sell their ideas as absolutes. Unfortunately, people have a bad habit of reading further into situations than is actually expressed. It is not in our nature or psychology to take another person's words at face value, exactly as they are stated. Take a moment to really look at the language that analysts uses; there are a lot of "maybes", "ifs", "possiblys", and "buts". They know what they are trying to predict is an inexact science.
Dig deep enough and you can find opinions confirming virtually anything on the internet. Do you know how credible Analyst A is? Perhaps you do, if you have followed that person for a long enough time and monitored their success rate. However, even then, there's no guarantee of history repeating itself. Analyst A may be perfectly on point the last 9 calls and completely botch the tenth.
An additional consideration is how the people that set policy utilize information and public sentiment to accomplish their goals for the economy. Is it conceivable that policy creators use popular analysts priming the public for "what is most likely to happen" to achieve a certain direction? If a rate cut is likely to cause a Bullish trend, but that isn't in line with the direction the policy makers are trying to drive; is it conceivable they hike a rate or keep it flat to prevent that from occurring?
Many markets are driven by participant confidence or lack thereof. It seems reasonable to me that policy makers would be analyzing participant sentiment to try to identify any trouble spots for the overall economic plan. However, I wouldn't think that there would be a major desire to shake markets too often. If I were a policy maker, it would be information I would use prudently.
Instead of trying to dive into the minds of policy makers and making an educated guess on how I think things will turn out with the assistance of people who are making educated guesses themselves; I use a simple Price Action method to trade news events. Today, I'm going to walk you through the strategy and the trade I executed on the 5 Minute, EURUSD chart.
A short disclaimer: Use this strategy at your own risk and definitely practice it on a demo account before going live. It can be very high stress and will not be suitable for everyone. Practice good money management and always protect your capital, first and foremost. I am sharing my personal experience with it. Your results will probably differ in some way.
The 5-Minute News Strategy
The goal of this strategy is to harness the emotion of the market participants rather than trying to guesstimate the impact the decision is going to have. Our actions are based solely off of what the Price Action is telling us. You don't even need to be watching coverage of the news event. You just need to know when the announcement is dropping for your time zone. Most economic calendars offer built in conversions so you can easily determine the correct time. On our platform you can see all news event feeds on the bottom row of tabs.
These rules are appropriate for EURUSD. I have not used or tested them on any other pairs.
1. Have your client open and logged in a half hour before the announcement. This is to ensure that you have everything set and ready to go, just in case of any problems. As always, you can never be too prepared!
2. Set your chart to 5-minute increments.
3. Wait for the very first candlestick to close after the time of the announcement. The FOMC is at 2 P.M., so we wait until 2:05 P.M. If there is volatility, you will see the price bouncing and carving out a fairly large candlestick.
4. Analyse the candlestick by asking the following questions:
a. Is the candlestick prominent? If yes, proceed to b.
b. Does the candlestick have a clear direction? If yes, proceed to c.
c. Execute trade.
In a majority of news price action movements that I've seen, A and B are easy criteria to fulfil and generally herald continued movement in that direction for at least a little while after the announcement. If the prominent candlestick is weak, then I am very wary of a potential reversal. The body of the candlestick must be at least 2/3rds of the entire stick. If 1/3rd of the candlestick is wick, there is strong counter pressure and I do not have confidence that price will continue that direction.
Now we have our entry criteria; so how do we take profit with this strategy?
The way that I take profit is very simple.
1. Set the Stop Loss to 25 pips. ALWAYS use a Stop Loss with this system. Conventional wisdom is to always use a Stop Loss in general; but it is even more important with trying to trade this short time frame during a news event. Latency problems and disconnections can happen! Protect your capital!
2. You can set a Take Profit if you want to, but I generally do not. If you're going to set a TP, I recommend setting it for about 38 to 40 pips ahead. I typically do not use a TP and instead determine my exit by what the Price Action is telling me. Sometimes the price will have a strong bias, other times it will dwindle out after a single candlestick.
3. Mandatory exit if there is no prominent movement for 3 candlesticks or a reversal pattern prints.
My Example Of Execution
Here is the EURUSD, 5 Minute increment chart. This particular chart is at a +9 from Eastern Standard. You'll note the time on the bottom of the chart is about 11 P.M. which puts the Eastern time at 2 P.M. when the FOMC Rate Decision is coming.
The first point of interest is the long, Bearish candlestick indicated with a White Arrow and the number 1. This is the 2:00 to 2:05 candlestick- the time of our FOMC announcement. Does it fulfil our criteria? Absolutely. Though I did not include the entire chart, all of the previous candlesticks are under half the size of it, most being much smaller.
The candlestick closes and we can see that even though we have Bear-side wick, it is not a 1/3rd of the total stick. I feel that bias is on my side for the moment. I execute my trade at the Yellow line with a 25 pip Stop Loss (denoted by the Red Line). Why so shallow on a news event? The most tumultuous time is typically the first five minutes after a news item has been announced. We have what looks to be a bias in the price action and a strong likelihood that we just passed the most chaotic waters. As a more conservative trader, I feel that 25 pips on the EURUSD is enough wiggle room to not get knocked out through general fluctuation while still giving me the room I need to profit.
My attention is devoted solely to the chart from the time of the news announcement until the time I exit the trade. I see continued Bearish movement in my favoured direction in the first two sticks after I place my trade. I can tell volatility is dying down because the candlesticks are getting smaller as we go. The first is a lovely Bearish stick. The second is showing a Bearish bias but we have wicks about the same length on either end. I interpret that as our Bearish bias starting to weaken.
Now we get to the candlestick denoted by the Dark Blue Arrow. When I look at that stick, I see indecision. The wick doesn't protrude much farther than the previous wick on the downside. The total size of that candlestick is very small with only a little showing from the Bulls. I feel this may be indecision as opposed to a pending reversal.
The strongest reversal indicators will be big and bold. Big and bold indicates there is significant resistance against the dominant trend. I'm not seeing this small, Bullish hiccup as a reversal just yet.
Now let's advance a bit until we hit the Aquamarine Arrow and our Exit. Our Exit is denoted at the Green Line and spurred by the candlestick indicated by the Aquamarine Arrow.
So what is the Price Action telling me at this point? There have been no significant movements or activity at this point. Price is hovering. I interpret this to mean that the volatility from the FOMC announcement has played out. There is no more strong bias based off of that volatility. At this point, price could move in either direction. Sure, it may continue down; or it could correct and head up.
Either way, I'm not gambling here. I'm using a methodology to ride the burst of market sentiment from the news announcement to profit. After three relatively inactive candlesticks and what looks like a Support level forming; I exit my trade because I no longer see any strong bias.
Entry was at 1.2680 with a Stop Loss at 1.2705. Exit was at 1.2640 for just over a 1.5:1 profit against my risk.
I feel this strategy is a simple, relatively lower-risk way to take advantage of news announcements. "Relatively" is the important word here. You're not getting in on the initial announcement; you're just trying to ride the remainder of the volatility after it has been established. In this particular instance, volatility did not carry on very long after the announcement. On the other hand, I've had a Non-Farm Payrolls run me to a 5:1 reward before it started showing weakness. My goal is to take at least 1:1. There is significant potential to take more than that; or you may only take 1.5:1; like I did today.
Either way, this strategy removes emotion, analysts, and guesswork. You're rarely in the trade for longer than a half hour. If you're keen to use this method; I advise studying up on Price Action interpretation and working on your candlestick interpretation skills. There's no reason this shouldn't work on different pairs and other currencies with High volatility news items; I just haven't tested it personally.