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Reviewed by Nick Cawley on August 18, 2022.
Trading forex news releases requires a high degree of composure, preparation and a clear strategy. Without these qualities, traders can easily be overwhelmed by all the excitement that a rapidly changing market can bring to their detriment. This article provides useful strategies for trading Forex news during important news releases.
Other articles in this series:
Forex News Trading Strategies
In the press release, there are two common forex trading strategies:
- Initial Spike Fade Strategy
- news spanning strategy
Each offers traders a solid plan based on the market conditions observed at the time of publication and how best to approach that particular market.
Before reading further, it is important that you have a solid understanding of the basics of news trading. If you’re new to trading or just need a refresher, check out our introduction to trading forex news.
1. Initial Spike Fade Strategy
The strategy aims to take advantage of market overreactions in the short term by moderating initial moves. This strategy is suitable for reversal traders, scalpers, and day traders, as there is often rapid and volatile pricing following major news releases.
Foreign exchange markets often experience overreactions and subsequent reversals, as large institutions exacerbate the heightened initial volatility. The market as a whole typically rises in overreaction, then pushes prices back to pre-release levels.
Once the market calms down and spreads return to normal, reversals tend to gain momentum and show early signs of a potential new trend.
A drawback associated with this strategy is that the initial peak can be the start of a longer movement towards the initial peak. This underscores the importance of using well-defined stops to limit downside risk and get you out of bad trades quickly.
To implement the initial spike decay strategy:
- Select the relevant currency pair: Make sure that important news events correspond to the currency pair you want to trade, i.e. H. Nonfarm payrolls affect dollar crosses.
- Switch to 5-minute chart: After selecting the desired market, switch to the 5-minute chart before the press release.
- Watch the close of the first five minute candles: The first five minute candles are usually large. When prices are close to peaks or peaks, ease the movement by trading in the opposite direction.
- Stop Loss and Limit: For short trades, the stop loss can be set 15 pips above the high, and for long trades, the stop loss can be set 15 pips below the low. The target can be set to double or triple the stopping distance.
2. News Straddle Strategy
The news straddle strategy is ideal for traders who are expecting a big spike in volatility but are unsure of the direction. The strategy takes its name from a typical straddle strategy in the options trading world, as it uses the same core strategy – exploiting volatility spikes when the direction is uncertain.
The downside of the news straddle method occurs when price breaks support or resistance, but then reverses shortly thereafter. Likewise, the price can trigger a pending order and move towards your target until the stop loss is reached.