How to Trade Reactions to News

Considering the nature of news announcements and their effects upon the markets, traders have often gravitated towards the events in the hopes of capturing a portion of the market response. Within FX, this phenomenon has drawn speculators interest to trading such events like a vulture to an about-to-be-corpse lying in a field below.

Because of the volatility and unique order flow surrounding such events, it is important to have specific methods when trading such events. We always recommend that if a trader is going to trade a news event, they pick the most significant of all economic events. Those would include:

1) Central Bank Announcements (FOMC, ECB, BOE, BOC)

2) NFP

3) Fed minutes Meeting

There are other economic events which move the market, but they have significantly less impact and probability to move the markets in such a stark fashion, thus we limit ourselves to the kings of the economic jungle.

The method we employ during such events is either a fade or breakout policy. For this article, we are going to focus on the breakout method, which is designed to give us an opportunity to take advantage of the announcement pushing the pair heavily in one direction due to the market response from the economic release.

Figure 1 below is the EUR/USD on the 5 minute chart. We always will want to have the 5 minute chart up for this strategy. We will also want two sets of Bollinger Bands up, a 1) 2.5STD BB and 2) a 1STD BB. As you can see price gets real contracted leading up to the announcement and then the price action surges at the exact time the announcement is made.

The candle immediately pushes heavy in one direction and for the next three candles, makes lower lows. If the move after 15 minutes has made lower lows with each 5 minute candle, and the 2nd candle closes outside of the wick of the 1st candle, then we will trade in the direction of the move or breakout. Our entry is shown by the 1st horizontal line at 1.5522. Our first target will always be 30 pips and our initial stop will be 30 pips. We will enter in with two lots. After hitting our first target, we will bring the stop to break even or free. From here, this is where the Bollinger Bands come in.

We will use the space between the 1 and 2.5STD BB's to act as a pocket or level of exclusion for order flow. If the BB's are still pushing in the direction of the breakout and price is still contained within them, we will stay short. Our exit will be directed by the price action relating to the actual BB pocket and when you have either of the two conditions below:

Choosing the Best Forex Market Maker Broker

The foreign exchange market (forex or FX) is a global market in which trading occurs in a retail off-exchange environment, which means there isn't a localized exchange where everybody trades and it is primarily done through an online trading platform provided by different Broker firms.

Unlike equities, which trade through exchanges worldwide such as the NYSE or the NASDAQ, foreign exchange transactions take place over-the-counter (OTC) between buyers and sellers from all over the world. Because this network of participants is not centralized, the exchange rate of any currency pair can vary from one broker to another. (To get a complete overview of forex, see The Forex Market and Forex Basics)

The main players in the forex market are the top banks in the world. This group creates the market for currency trading and they are known as the interbank market. Retail traders are unable to access the interbank market, but they can trade forex through two types of brokers: market makers and electronic communications networks (ECNs). The main differences between these two types of brokers and how they can affect your forex trading, are discussed below.

Forex Market Maker Broker

Market makers "make" or set both the bid and the ask prices on their trading systems and display them to their customers, on their quote screens. They stand ready to make transactions at these prices with their customers, who range from banks to money managers to individual retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction, market makers must take the opposite side of your trade. In other words, whenever you buy, they must sell to you and vice versa.

The exchange rates that market makers set are based on their internal guidelines. They mainly generate profits through the spread that is charged to their customers. The "spread" is the difference between the bid and the ask price and is often fixed by each market maker. Spreads typically remain competitive due to the number of market makers providing services in the retail off-exchange market. By generating profit on the spread, market makers can offer "no commission" or "zero commission" trades. Since these market makers are counter-parties to your transaction, they will often hedge the transaction, but may decide to hold your order and trade against you.

The two main market makers in the industry are Institutional market makers and retail market makers. Institutional market makers are banks or large corporations who usually that offer quotes to other banks, ECN's or corporations. Retail market makers are solely dedicated to offering retail off-exchange forex trading to individual traders.

How to Apply Leading Indicators to Both Forex and Equities Trading

A leading indicator, also called an oscillator, is a motion or force that moves back and forth between two points. It is a technical analysis tool that is used as a trend indicator for identifying trends when they are not clearly identifiable. It is most commonly used when the currency or underlying stock has traded in a specific direction for some time and it appears that it may reverse, although it may not be obvious upon first glance.

These leading indicators are used to find a breakout into an upward or downward trend and are often meant to identify reversals. They will potentially signal a buy or a sell when the market is oversold or overbought and the previous trend has run its course.

Stochastic, Parabolic SAR, and the Relative Strength Index (RSI) are all oscillators. Each indicator/oscillator can signal a possible reversal, where a previous trend has ended and the price is ready to move in a different direction.

Below is an example of how all three indicators lined up to give us the proper signals: On the 1-hour chart of EUR/USD below, we added Parabolic SAR, Stochastic and RSI indicators.

There are sell signals between the hours of 8:00 am EST and 9:00 am EST on 12/18/08. All three sell signals occurred within one hour of each other. This would have been an excellent trade. As you can see, the Parabolic SAR indicator gave us a good sell signal and the RSI indicator remained in the overbought position for a long time and then ventured out. Usually when an indicator remains in the overbought or oversold level for a long time, it means that a strong trend will occur upon breakout. The Stochastic was not really in the overbought position, but still showed us the crossing of the two time intervals in a downward trend.

A sell could have taken place between 8:00 am EST and 9:00 am EST. Let's say we sold at 9:00 am EST, just to make sure there was a trend occurring and so we didn't receive any false signals. We would have sold at a price of 1.457 on the open of the new candle.

How to Automate Forex Trading

Using "Automated Trading Robots" or "Expert Advisors" or simply "EA", is easily done on the Metatrader 4 platform, but did you know you can have multiple expert advisors running at the same time on one platform?

For purposes of this article, I will use the forex Metatrader trading platform as an example, since it is a very user-friendly platform and can easily run expert advisors.

Assuming you have already opened a live Metatrader trading account with your preferred Forex Broker, go to the file menu in the top left corner to open a new chart. Click on "New Chart" and then choose the currency pair you wish to trade. You can also simply click on the Chart icon in the top left corner of the screen to save yourself an extra step. The chart will be shown in one of the tabs below, as the line in red indicates at the bottom of the screen on Exhibit "A". Follow the same steps to open your second chart, if you wish to trade the same currency pair with another EA. You must do this if you are to trade multiple EA's on the same currency pair, since you will not be able to trade multiple EA's on one chart.

Exhibit A

If you already had your first chart with the correct currency pair in the first tab, once the second chart is created, it will automatically go to the last tab of any other charts already there.

For convenience, you can move the chart you just created closer to your first chart, so you can easily toggle between the two charts. Click and hold on the chart you just created, then drag and drop on the tab next to your first chart and it will replace whatever chart was there. You can see in Exhibit "B" below that we have moved the second EUR/USD M15 chart next to the first one. Alternatively, you can minimize your chart and view them all on one screen, as shown below.