This five-step process is designed to help forex traders assess market conditions and ensure proper risk management when trading risky but potentially lucrative news and economic reports, writes James Stanley of DailyFX.com.
Trading news announcements like non-farm payrolls can be dangerous, and anyone going into a news release without fear of how badly an account can be ravaged by volatility should probably avoid doing so, and instead wait for quieter markets.
But, to the trader who always protects their downside, adheres to strong money management, and protects their account by avoiding the number-one mistake forex traders make, news announcements can offer compelling opportunities for a lot of movement in a very short period of time.
Watching price action can assist greatly in the initiation of trades, and this movement and volatility can bring a significant amount of pips to a trader’s account.
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Rampant volatility that can typify news releases can deplete a trading account quickly if trades around news events are not handled properly.
What follows is one of the more common ways traders can look to trade the news regardless of which way the announcement comes out, but before we get into that, let’s establish a couple of important points.
- Nobody can tell the future (which is why risk management is so important in the first place)
- We will likely never know what the news will be before the release (see #1 as to why)
Even if we did know what the news announcement would be, we still don’t know exactly how the market will react to this news.
To sum it up, trading news announcements adds additional volatility to the trader’s charts. By many accounts, trading news is very similar to trading in “panic” situations. The more important the news announcement, the more potential volatility that may enter into the market and the more similar to a “panic” situation that news release is.
An announcement like non-farm payrolls (NFP) can bring some significant movement, as much of the world is watching this figure for signs of future direction.
Step 1: Observe Price Leading into the Announcement
At 8 am ET, approximately 30 minutes before the NFP announcement, the trader can plot support and resistance based on price action. This can be done by observing the past few hours immediately prior to the release, and drawing a rectangle around the high and the low that was hit during this period. This can be done on the five-minute, 15-minute, or even one-minute charts—the high and low of this time period will be the same.
If looking for maximum movement, often one of the major currency pairs (any currency with USD in it) will suit that need. If looking for a more conservative approach, cross pairs can certainly work as well (pairs without the US dollar).
Below is a chart of the most popular currency pair in the world, the EUR/USD, for the 14 hours leading into an NFP report: