Why Load the Boat?

In all trading we identify opportunities through our analysis which we anticipate favor a price movement in one direction. One of the most challenging parts of trading the news can be getting filled where you want.  What makes this trade so special is the fact that this is the premise behind the trade.

Although this is a trade that does not happen very often it is a trade that offers some of the greatest risk to reward ratios I have ever experienced in day trading. The thing with news trading is it is notorious for wide spreads and poor fills.Now we need to consider why this is so, so that we can understand the advantage that this trade offers over other strategies.

Forex is a zero sum game, what this means is that for every buyer there has to be a seller or there is no trade. This is exactly what happens around these major announcements, many players are extremely risk averse at these times and therefore remove all there standing orders that they have in place and sit on the sidelines until after the volatility generated around news time has died down. The outcome of this is a major reduction in liquidity and therefore the chances of finding someone to take the other side of your trade are significantly reduced.

Many traders attempt to trade the news and fail miserably, this is because they don’t understand what is taking place at the time of the release. The number one biggest mistake a fledgling news trader can make is to try and capture the breakout of the release. They access the release and then place their order to then see it get filled 40 plus pips later. The best explanation for this is covered in this post The Structure of Forex Brokers, I recommend you read it first and then continue with this post.

This trade has a specific set of rules and things to look for and after you understand what is actually happening you can begin to see the enormous opportunities that exist. For this example I will use the same one I used for my News Trading for Easy Money Post. As I stated in that post, prior to news announcements especially the NFP price will often oscillate in a tight range prior to the release, when this happens it is quite easy to identify where the orders will be but is not a pre-requisite for the trade.  All I am really looking for are the most recent highs and lows.  I am talking about the last hour or two on the 5 min chart,  this chart shows what I am talking about.

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This is KEY for it is these highs and lows  that the bold breakout traders will place there orders outside of in anticipation of capturing the breakout.  It is also quite common for these same traders to place an order on both sides of this range in essence straddling the range in preparation for grabbing the breakout which ever way it goes.  It is these orders that I am targeting with the spike,   it is why the spike forms and therefore there is someone there to take the other side of the trade.

This is what makes this trade so appealing to me, the fact that my odds of getting in early on the move and getting filled are remarkably increased due to this phenomenon. In this example the forecast was -119k and the actual release was -11k, this is great news for the US economy and therefore the GBP/USD pair should see a significant fall in price.  In the next chart you can see the spike clearly and it is this spike that I endevour to catch.

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The previous high was 1.6664 and the high of the spike was 1.6672, 8 pips and then price reversed and proceeded to drop like a brick, price dropped over a 100 pips in the next 30 minutes.  If you fail to catch this first move then you simply stand aside and await the first retrace, once this forms you use one of the other strategies to look for your next entry.

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I stated earlier in the post that this trade does not happen that regularly but when it does I hope you can now see the opportunity this trade offers.  Please note that prior to the release it is best to drop down to the one minute chart as you get a much clearer view of the price action and can fine tune your entry.

This style of trading is not for the faint hearted and again I can’t stress the importance of back testing, this all happens pretty fast and you need to be on the ball to interpret the release and take action in seconds.  The most important thing is getting the announcement on time.

Most forums are useless for this style of trading as by the time you get the number it is to late.  Many brokers have instant news providers now and if not there are plenty of providers out there.  The best value for money that I have found is a website called TradeTheNews.com, they offer both a text platform and an audio platform.  The audio is the best choice as you get to hear the release rather than have to read it but this is all dependent on your budget, but as a whole once mastered the text is quite adequate.

I should have some videos up soon that will demonstrate clearly how to do the various news trades and I will elaborate more on trade management as well and profit taking,  I am also doing one demonstrating how I back test  these strategies which I feel will be immensely beneficial to many of you.

Perry

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News announcements generate some of the best trading opportunities that exist in the markets. This style of trading has one distinct advantage over other styles of day trading and that is from a time management  point of view. A news strategy allows you to pick exactly when you want to trade, you could pick just the very major announcements and just trade 5 or 6 times a month and potentially make quite a substantial income.

Some of these that I consider to be great opportunities are:

• NFP – Non Farm Payrolls
• Cash Rate
• CPI – Consumer Price Index
• Trade Balance
• GDP – Gross Domestic Product
• Retail Sales
• New Home Sales

This is by no means a comprehensive list and each country has different announcements that can effect it’s currency.  I only trade the US announcements and really only trade the eur/usd or gbp/usd on these types of trades. Forex Factory has  a good comprehensive calender here that will give you all the announcements for the week and rates them  as high, medium and low impact announcements.

Working out just how much of a surprise is the only real challenge with this type of trading and does require a bit of homework to ascertain what would be a minimum surprise for you to take a trade. To get these figures I have used a combination of  ForexTester (which anyone who follows this site will know I consider an absolute must for anyone wanting to succeed on this path) and Forex Factory that has a 10 year history of economic announcements on their site.

For all examples in this article I will use the NFP announcement as in my personal opinion it is the best of the best when it comes to news trading announcements.  For me I look to see a change of a minimum 80k in the number for me to even take a trade, anything less and that’s it I just turn off my computer and call it a day.  I recommend you all do your own back testing and armed with that knowledge you can choose at what level you feel you are comfortable the odds favor a decent move.

This strategy will complement My divergence strategy that I wrote about previously.  I am working on the same principal that when there is a significant surprise and as an example that it is positive for the currency, I am only interested in trading in that direction, this is paramount and trading the other way is next akin to trading against the trend.  This is a distinct advantage as  I now know which direction I am going to trade and now just need to find an optimum entry point, stop loss and profit target.

I rarely trade the breakout of the number as unless you have access to an exceptional broker the odds of getting filled are not good.  You can place a trade and get filled 50 pips later only to watch price retrace and take out your stop, I am yet to find a broker that you can get a decent fill in these scenarios.  There is one exception to this rule and that is  when  I witness a huge spike in price in the opposite direction to what I  expected. This to me is like waving a red flag at a bull, when I witness this type of price action it is time to load the boat.  I will generally go to my maximum level of risk  on this type of trade as the rewards can be exceptional.

Why do these spikes happen?  This is the market makers and banks targeting stops before taking the market in the right direction.  I see these situations all the time and they are what are known as false breakouts, these banks and market makers have the luxury of seeing exactly where all the orders are and if they are within their reach they will drive price in that direction, take out all the stops and then drive it back the other way and thus literally double dipping and accumulating more profits  for themselves.  I personally don’t have access to these orders but just by understanding what is happening I can capitalize on this situation and literally ride on their shirt tails.  I am writing a separate article on this trade so keep your eyes peeled for that one, it wont be far away and I will add a link to this post when It’s done.

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My goal in this situation is I want to wait for price to have its first run then when it starts to pull back I look for an entry to get in on the retrace.  This for me is completely discretionary and I have a number of things that I look for to enter a position. I use a combination of candlestick patterns, oscillators, a moving average, Fibonacci retracements, support and resistance and the count back.

Depending on the type of announcement depends on how large a move price will initially take.  For the NFP when the numbers meet my criteria I expect to see an initial move of between 50-90 pips.  It is possible to capture some of this move but it is definitely not the easy money, for this trade I am only after the easy money and this is simply a matter of waiting until all the players have cast their vote.   At this time we know the direction and are then awaiting a pull back in price for an entry opportunity to present itself.

The entry is then a matter of getting aboard the move once price has retraced.  You will have to establish your own entry criteria but what we are looking for is a reversal or a rejection of a price level, this could be as simple as a pin bar at the 50% fib level or any signal that meets your own personal criteria.

STOPS

To establish a stop position for this type of trade is very easy for me as trading these small time frames I am trying to keep my risk small and position size appropriately as large as I can in accordance with my own risk parameters.  I simply place my stop a few pips below the low of the reversal point I have identified as my entry.

Profit Targets

Setting profit targets is of major importance to the success of any trading strategy and extremely challenging for most new traders.  There is always the challenge of how to identify when to exit a position.  For most it is a matter of finding a balance between protecting profits that are currently on the table and exiting to early in the move and leaving a large percentage of the profits on the table.

This process for me is quite simple and  easy as I use three indicators to identify when to exit a position or at least take partial profits.  The indicators I use are support and resistance, recent swing highs and lows and the ADR or Average Daily Range.

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To Summarize the process should be like this:

1. Just before News is released asses where the profit targets are
   • What is the high for the day?
   • What is the low for the day?
   • What is the ADR for the currency pair?
   • What are the most recent swing highs and swing lows?
   • Project profit targets using the ADR
2. Once the figures are released we then assess them and ascertain whether they meet our trade criteria. This is a simple yes we are trading today as the figures are within our guidelines or no they don’t meet our criteria so no trade.
3. If the figures meet our guidelines it is then just a matter of observing price action and identifying the first significant retracement in price.
4. We then take a position using our entry rules.
5. Place the stop just beyond the high or low of the retracement.
6. Since we have already calculated our profit targets its is then just a matter of observing price and taking profits appropriately.

This is my News Trading in it’s simplest form and if this is not completely clear don’t panic as there will be plenty of follow up articles.  I am also making videos of trading examples which will make the whole process much clearer.  I will post the links to other articles in this post as I produce them.

Perry

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This is an extremely effective forex strategy that I use for trading the Non Farm Payroll numbers.  This strategy can be used on any news announcement,  the key to trading this strategy is you want a substantial fundamental surprise.  What I mean  by this is you are looking for a dramatic change in the actual number compared with the forecast number. The bigger the surprise the better the opportunity exists for profits.  What this surprise creates for technical traders is momentum and momentum means OPPORTUNITY.

I Love the Non-Farm Payroll as in my honest opinion it is the best trading day of the month,  If I were to only trade once a month then this would be it and as I have stated many times, you only need to master one trading method and you are on your way toward financial freedom.  This would give anyone a realistic chance to trade as it requires only one day a month of your time and you really only need to trade for about five to six hours and your done.  It is quite easy and far less time consuming as other methods  to back-test as well.

I know a lot of people who won’t go near the market on this day as they are scared due to the volatility but it is this volatility that creates the best opportunities!

When there is no surprises in the announcement and I am not looking at any other trades on the higher time frames I will just turn off the computer and take the day of as it will generally be a choppy one.

First thing  we need to do is identify what is a surprise so we know when to trade and not to trade.  A surprise has to be a very substantial shift in the number from the forecasted number.  I will use last months as an example as this is exactly what happened and thus there was a great opportunity for profits.

Now before I go any further there a many ways to trade these large announcements and over time I intend to cover a lot more of these but for today I am only going to discuss this one strategy to try and simplify things.  For the numbers I will use Forex Factories calender as it is available to all and quite reliable.  The only downfall to this is the number is generally delayed for two to three minutes but as this trading strategy is not about trading the news it is fine for this purpose.

Here I have inserted a picture of their calender on the day

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You will note that the previous months number was 4k or four thousand more employed people than the previous month.  This month the forecast is that there will be 3000 less employed people than last month, now look at the actual number.  There was actually 85000 less employed people than the previous month and 82000 less than the forecast.

This is a great example of  a fundamental surprise, now if the number had been only 50k or less I would not trade. When the surprise is less substantial the trading day tends to get very choppy and therefore much more challenging to trade.  What we are seeking is a very definite indication of market direction and when the surprise is large generally you will see the market move in the direction of the surprise.  In this example the USA had 85000 less jobs and this is not good at all for their economy and therefor not good for their currency.  The outcome is a weakening of the US Dollar or inversely a strengthening of there cross pair.

In this example I will use the Eur/Usd pair.  So this number should see a substantial bull move in the Euro due to the sudden weakness in the greenback and this is exactly what happened.

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Now for the rules

• We trade the 5 min chart
• First and foremost, we are only interested in trading in the direction of this fundamental shift so in this scenario we are only looking to buy or go long.
• We do not trade at all for the first fifteen minutes after the news is released.
• For the divergence I use the Stochastic Oscillator and the settings I use are 5,3,3.
• What I am looking for is divergence between the oscillator and price to give me a  signal to take a long position.

OK lets walk through the setup know and see just how to trade it. Once the news has been released we wait patiently for the first fifteen minutes and then we can start looking for our entry. There was an opportunity in this instance that appeared just shy of two hours later. After I have identified the divergence I then need to calculate my position size.

For this trade we placed our entry after the stochastic turned up confirming the divergence and also signaling our entry, this was at 1.4322.  To calculate our position size we need to know where our stop is and in this instance we would place our stop below the previous low, this was at 1.4294,  this gave us a stop-loss of 28 pips.

I will just go through how I calculate this just for those that are unsure.  We will assume that I have a trading capital of $10 000 and am risking 1% of capital per trade. So 1% of 10k is $100 dollars, to calculate my position size i simply divide 100 by my risk of 28 pips which would give me 100/28=3.5.  This equates to either 3 mini lots or 35 micro lots depending on your trading platform.

All that’s left to do now is place your target and for this I would use the previous high and this was at 1.4400.  This particular trade had a total risk of 28 pips and a total reward of 78 pips so a risk to reward ratio of 2.8:1.

Here is an image of the trade

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This is a simple strategy that is very effective if you have the patience to wait for the setup and the control to sit by and watch some very substantial moves that generally precede this trade. This is the trade in its simplest form, I have an advanced way I trade this setup and that is once the divergence is confirmed I look for a significant candlestick pattern to give me an entry and a stop position.  What I look for is either an engulfing pattern, a pin bar or an Inside bar to trigger the trade and then place my stop on the other side of the pattern.

In this particular scenario you could have used the breakout above the inside bar and placed your stop just below it.  What this achieves is a much smaller stop and thus the potential for larger position size and thus greater profits. In this case our entry would have been at 1.4321 with our stop at 1.4305.  This would have reduced our stop to only 16 pips allowing us to take a position of 6 mini lots or 6.2 micro lots.

Now this also offers greater potential of being stopped out so it totally depends on your appetite for risk as to the way you personally take these trades. I am inclined to take the lowest risk trades as I have learn t that risk is the only thing I have any control over in this game and when I am right I prefer to be positioned well for it.

So from here if this style of trading appeals to you then back-test it, try it and then implement it into your arsenal of trading tools.

I have a few other methods that I use to trade the NFP but will save those for another article.

Perry

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Support and Resistance  is a very effective tool for finding and locating turning points in the market.  New highs and lows are points where all traders should be extremely cautious and observe how price reacts to these areas. They are excellent places for traders to both enter or exit a market depending on the individual situation.

The example above  shows just how effective this  is.  Lets walk through this chart and identify opportunities to (a) enter trades and (b) exit trades.   Starting from the far left of the chart you can see that the USD/JPY is in a solid down trend,  you can see that when it reaches the point I have marked “First Test” , that price forms a bullish reversal pattern.   This alone is not a big deal, but when price retests the same level and forms a large pin bar rejection candle,  as it did at the point I have marked “Second Test”,  it is time to take notice.

Price,  if observed closely can reveal small clues like these leading to its future direction.  In the above example the pin bar for me would be a solid confirmation that this area is now support and a good time to (a) exit any short positions we are currently holding and (b) seriously consider taking up a  long position.  These Support areas also supply us with key information as to a great place to position our stops, directly below the support line.

Top and bottom picking can be a very tough game, but when we capture one of these moves the rewards can be phenomenal.  These types of trades are not for everyone and would be considered by some as a fairly aggressive entry.  The more conservative trader can still use support and resistance in there trading, the next example on the chart is just one of these examples.

Resistance when broken  becomes support and vice versa.  In the above example you can see where price didn’t even hesitate as it just punched clean past the previous high,  which we would be watching closely to see how price reacts. This swing  high is considered to be previous resistance and when price doesn’t hesitate at this area and keeps going,  this is an another good spot to consider entering the market.

The only problem with this type of entry is that a stop point is not as obvious.  It could be placed safely under the old support under the pin bar that we previously identified.  The problem with this is that we have a huge stop and our position size is dramatically reduced.  Our second choice is somewhere below the resistance that was broken at the previous high.

Now if for example we are an extremely conservative trader and we didn’t like either of the two entries that have already been identified,  then we can just wait for something that meets our criteria.  If we follow price some more, an example of just such an opportunity presents itself.   Price after punching through the previous high runs up some more and then starts to retrace.  when price forms a bullish reversal pattern like the one I have marked “Change of Polarity” it is time for the conservative trader to take action.  It is at this point that there is enough information that the scales  have been tipped for even the most conservative traders to take up a position.  Now lets just identify exactly what that evidence is that has tipped these scales.

• Price formed initial support at the point marked “test 1″.
• Support formed and confirmed by the double bottom pattern formation at “Test 2″.
• Strong candlestick reversal patterns formed at these support points.
• Price thrusting through previous highs with good momentum.
• Price forming a strong candlestick reversal pattern at previous resistance levels confirming a change of polarity.

This  “change of polarity” pattern appears in the charts time and time again.  It is an excellent place to enter the market that stacks the odds in your favor and also identifies an ideal spot to position your stop order.

Support and Resistance should have a place in every technical traders tool box, these are just some of the ways that you could take advantage of the opportunities that support and resistance trading can present to you.

Perry

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To build a trading system really only requires three ingredients.

1. An entry point – A rule set to get you in the market.
2. A stop point – A rule set to get you out of the market when the market is not doing what you anticipated.
3. A exit point – A point at which you exit the market with profits

This is really pretty straight forward and should be easy to do one would think.  In my honest opinion a strict rule set for all three is absolutely necessary, without this you are doomed to failure.  There is still discretion involved but the market needs to meet a set requirement for you to act.  So lets look at each ingredient and some examples that would fit each ones needs. Read the full story

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I would like to explore the process of  designing a trading system. Please note that this is all based solely on my opinions and experience only.  This does not mean these are the only ways and methods, there are literally hundreds of good trading systems out there, but I can only write about my own experiences as this is what I have learn t.

I will explore two systems which I think encompass a very large portion of trading systems generally. The first of these would be trend following and the second I will just call swing trading but would include  methods like scalping, day trading and the like.  I will try and define the two for simplicities sake. Read the full story

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