I have been profitably trading news since the beginning of July and the results have been phenomenal. Here is how it works.

I did the legwork and went back and documented the actual headline number versus the consensus forecast for all U.S., Eurozone, British, Canadian, and Australian scheduled economic releases, minutes of meetings, interest rate announcements, and monthly bulletins, since the beginning of the year.

When the actual is significantly different then the consensus forecast, there is an initial 20 to 50 pip price gap, followed by an additional 50 points or more of directional move. The news itself seldom justifies the extent of the move; what apparently happens is market perception shifts, and both short term and long term traders are “going the same way”.


HOW TO STRUCTURE TRADES FOR MAXIMUM RETURN / MINIMUM RISK
Practically all the FX broker electronic platforms guarantee fills at the rate on stop loss orders. Thirty second prior to release time place a stop loss order (orders) and adjust the entry level if necessary until release time. There are two types of orders:

1) Targeted buy or sell.

2) Straddle.

Targeted Buy Or Sell
Targeted buy or sell is used when you wish to enter the market if a specific event occurs, such as the announcement of an unexpected change in interest rates. A stop loss entry order is placed such that the order will most likely only be triggered if rates or in fact changed.

For example, in July there was an outside chance Canadian rates would be lowered. I entered stop loss buy USDCAD orders 15 and 25 points above the current market just before the announcement. If rates are left unchanged I cancel the orders immediately. Generally a small reaction opposite my orders will occur as traders who were long USDCAD into the announcement square up. Point is there is usually time to cancel orders. In this case rates were lowered and USDCAD was 100 points higher in seconds (I was long USDCAD 85 and 75 points below current market).

A more recent example; release of minutes of U.K. policy committee meeting on Wednesday October 22nd; if vote on holding rates steady was close, market would buy GBPUSD and sell EURGBP. Turned out to be 4 and 4 and the head of the committee cast the deciding vote to hold rates steady. When this news hit the wire GBPUSD took off. I was able to get long GBPUSD at 1.6750 by having a stop loss in the FX brokers. Market traded to 1.6790 in a heartbeat and proceeded to 1.6930 by days end.

Later in the day Canadian retail sales and leading economic indicators were due out (GMT 12:30). Market was looking for weak numbers; USDCAD was sitting 20 points off multi year low. The USD was getting chopped up elsewhere, especially against GBP and EUR. I entered stop loss orders 10 points below market price just prior to news release; my thinking was if the numbers were pretty good the lows in USDCAD would be taken out because the flipside – USD – was tanking. Numbers were pretty good – USDCAD collapsed.

There are trades similar to this almost everyday in one of the major currencies. When I am wrong, most times I can pull my order and lose nothing. Sometimes the number is just slightly good enough or bad enough to trigger my entry; in those cases (rare) I am stopped out for a 10-point loss – worse case basis.


With a risk/reward ratio of 10 to 1, it is easy to imagine the potential here.

2) Straddle
When the USD is sitting on the fence and a sudden wind (news release) will determine direction I enter orders on both sides of the market to enter if a scheduled news release is a surprise – significantly different than consensus forecast. There are many indicators that are notorious for coming in far away from consensus forecast – monthly unemployment, retail sales, and durable goods to name a few. Unemployment and retail sales are important directional indicators; as such, when the consensus forecast is way off a price adjustment in the USD occurs. What’s key is that the price adjustment is usually a lot more than what would be expected based upon the forecasting error. What’s even more ludicrous is that the government agency releasing the news states on their website that the forecast can be off. Retail Sales for example; the government acknowledges it can be 1.5% over or under; they call it statistical error.

Doesn’t matter. Fact is there is usually a big move in the USD when these numbers aren’t close to forecast – and that’s about half the time.

The straddle trade risk is 24 points. For example if EURUSD is 1.17 80-84; a sl sell at 1.1770 and sl buy at 1.1794 are entered. Once one side is triggered, the stop loss is moved to 10 points and then breakeven as soon as practical to do so. As a general rule once the position has 5 points profit the stop is moved to 10 points from entry and then to breakeven when a 15 point unrealized profit is reached.



WHAT CAN GO WRONG
1) Scheduled Economic release: Headline number good, revision bad (and visa verse)

2) Minutes, Monthly Bulletins: Good stuff and then bad stuff; similar to above.


BOTTOM LINE
The new frontier is on-line FX brokers; they honor stops at the price – at a price – when your level is reached your done. For example a 1.1790 stop in EURUSD is done when market reached a low price of 1.1790-94. This is where they get you. In addition they can mess around with the spread and stop you out. For example, interbank may be at low of 1.1790-92; they jack in 1.1786-90 and stop everyone out to 1.1786. Not a problem with news trades as market usually gaps anyway.

There are other ways to take advantage of news trades; such as repeatedly refreshing the government website that reports the news starting 30 seconds before scheduled release. Sometimes the news hits a little early… and I hit a few bids (haha).

Although the strategy does best with guaranteed stops, the results would still be good without guaranteed stops. However, the risks would be greater. Since I have never been a fan of risk I prefer to enter orders prior to news release.

Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com