Trading on the News in the Forex World is Both Defensive and Offensive

Trading in foreign currencies is never an easy occupation.  The market is enormous, as is the stature and financial capacity of most major participants.  For a single retail trader to assimilate every bit of news and financial data and out-guess the “Big Boys” is often an effort in futility.  The exercise becomes more one of managing risks and searching for a strong trend to latch onto for an extended period of time.  Losses are inevitable, but if controlled, then one good trend can offset several losing trades and offer potential profits and the opportunity to utter that favored phrase, “The trend is my friend!”

One learns quickly that major news releases can be a “double-edged sword”.  If you are unaware of a pending major economic release, the subsequent volatility can wreck the most well-intentioned trading strategy.  Fundamental data releases from government agencies around the world influence stock, commodity, and currency markets daily.

However, the forex market tends to react more severely to these releases since the relative value, i.e., exchange rate, of a given currency pair is determined by the global consensus of traders’ evaluation of economic variables.  Typically, the forex market stalls before a major release, then an initial “head fake” ensues while analysts assimilate the data to form an opinion, and once an opinion is formed, the market moves quickly in one direction.  The resulting trend can last for hours, even days in some cases.

Employment data appears to be the largest market mover in this category.  The release of Non-Farm payroll data on the first Friday of every month by the U.S. Department of labor is a much-anticipated event.  The chart below is indicative of the unfolding events:

forex news trading

The market reaction of the “GBP/USD” currency pair is depicted for this previous Friday’s release, the first such release in 2011.  The data is generally released on the first Friday of every month at 8:30 EST, or 13:30 Greenwich Mean Time, GMT, as per the chart above.  As one follows the timeline from the left, the market anticipated good results in the data that would strengthen the Dollar, the “head fake” so to speak.  After recovering during the “assimilation period”, the market reacted in the opposite direction, a 120-pip move, as the employment data was not as strong as the market had believed that it would be.

“Trading on the news” is the moniker given to this short-term trading strategy.  It is often said that it is not for the faint of heart because market movements can be radical with many “head fakes” to deal with before the solid trend takes over.  The shear volume of trading orders also becomes problematic, often inundating the servers and switchboards of forex brokers, such that order execution becomes paramount and the responsibility for executing stop-loss orders is often exempted by your broker agreement.

For those traders that feel worthy of the task, it is highly recommended that you practice several times with your forex trading demo account before venturing into these volatile trading waters.  It is not necessary that you perfectly time the market or guess which direction will be the most likely to occur.  The objective is to grab onto the trend once it has formed which typically takes about forty-five minutes from the release point.

The British Pound pair is generally accredited with the most potential for movement.  In this case, the 120-pip move would have generated a 70 basis point return.  The comparable returns for the EUR, JPY or AUD were in the 55 to 60 basis point range.

Currency Trading Strategies

This article will look at the two types of general currency trading strategies that forex traders use to make a profit. Currency trading strategies are no different in nature than from any other investment strategy or even poker and sports betting strategy, where there is a factor of random happenings. The currency market has a huge variation, that is, it’s very volatile and sometimes very unpredictable. The key to making money is to use currency trading strategies to deal with the chaos in a systemic approach. There are generally two types of currency trading strategies used by traders: Technical Analysis and Fundamental Analysis and they are very different beasts to master. Both have their pro’s and con’s. Which strategy you choose depends on what kind of person you are and how that relates to forex trading. Fundamental Analysis is popular with more analytical traders who have good deductional skills and are able to follow news releases and understand the big picture. Technical Analysis is good for traders that have good intuition and a good understanding of trading psychology.

  • Technical Analysis.

Technical analysis uses charting data to look for patterns in trading and predict the future price by analyzing market movements and price trends. Traders use tools such as candlestick graphs to see the volume traded and the variation in each time period. By putting it all together they attempt to make a qualified ‘guesstimate’ of the current market sentiments. Technical analysis uses the assumption of repetitions trough history, that trading psychology stays the same over time even if the circumstances change. So by comparing the current market with known patterns in the past, the technical trader tries to make more true projections than false ones. Technical analysis is a very important skill to learn, if you want to be a successful forex trader. Currency trading strategies based on technical analysis may seem confusing at first, particularly if you do not have a mathematical background, but luckily there’s a big market for tools that help the trader. Most of the hard grunt work can be done by software today.

  • Fundamental Analysis

Fundamental analysis is the conservative approach to forex trading. It’s similar to fundamental analysis of stocks and shares. In the stock market the fundamental trader will look at the books and key figures of a company to figure out if the company is sound and performing up to the price. In forex trading the process is essentially the same, except there are many more factors to consider. In stock trading, you can do well by only knowing the company and the field they trade in, but in forex trading you must consider a nation as a whole and everything that affects the price of it’s currency. These factors can be economical (GDP, Inflation, Unemployment) or political (leadership, elections, government stability). You must also consider geopolitical developments and central bank policy. The backbone of currency trading strategies based on fundamental analysis is an interactive forex calender that lists all releases of economic data and key figures.

Forex Scalping 101

In this article we are going to look at one specific trading strategy that some forex traders use to make profit: Scalping. Scalping is the art of holding positions for a very short relative time in the market in order to make many small gains over the course of a day. But before we get into the specifics of scalping, let us take a look at some of the fundamentals behind all technical analysis fx trading.

The forex market is a highly liquid market, liquid in this regard meaning there is a high number of trades being carried out every day. In fact there are more trades being done n the forex market, both in value and number, than in the stock market and bond market combined. That should tell you something about the enormous size and volatility of the forex market.

Of course this gives traders the perfect opportunity to take home profit. A busy market is always better than a slow market, no matter if the price is going up or down, there is always profit to be made. Generally there are two main schools of forex trading: Fundamental Analysis and Technical Analysis. In this article we will look at the part of technical analysis that is called ‘scalping’.

Technical analysis is the discipline of trying to predict future price movements by analyzing past prices with mathematical models as well as psychological predictions. It is beyond the scope of this article to teach you about technical analysis in depth, so just consider that technical analysis is about statistics, probability and most of all psychology. It is about watching a forex graph carefully and looking for exactly the right time to get in and execute a trade, and then get out fast once the pips are made (pips are forex terminology for how to measure your trades profitability).

Scalpers use many different tactics to take home their profits and the methods used can seem confusing for a beginner. Some starting points you should get familiar with are ‘candlesticks’, ‘support and resistance’ and ‘bullish and bearish markets’.

Remember that scalpers trade on market sentiment and feelings, not on numbers or news. They interpret the movement of a graph as other traders emotions about the market.

Scalping is usually done using forex signals, which you should also study. Forex signals are technical indicators that look for certain favorable market conditions and then signal for the trader to get in. These are often automatic.

A scalper is the equivalent of playing short game in sports, looking for a steal here and there, an extra yard, accumulating small gains to make up the days profit.

Scalping is a trade form that requires discipline and strong emotional control as scalping is a stressful way of earning a living. If you lack self control you are better of staying away from scalping and look at day trading or position trading.

Free Forex Strategies

Free Forex Strategies and Systems

In this section I have tried to put together a group of FX Trading Strategies for you to try. Most of these free forex trading systems can be used on any size of trading account including micro, mini and standard.

Proven Forex Trading Strategies

They have been tried either by myself or by my trading friends and they have shown to be winning forex strategies. However, as with any forex trading strategy, excellent risk management must be used at all times.

Choosing a Forex strategy

When choosing a currency trading strategy , it is important to select one that best suits your needs. It would be no use using a strategy that required you to watch the market during the whole of the London session if you had a day job. The strategies below are all easy forex strategies to follow. You can of course modify them if you feel you can improve on them.

Forex Scalping System

This is an easy little strategy to follow. It involves pinpointing major support and resistance point. You can use fibonacci retracements for these. Then when price hits a major support point, go long. Whenever it hits a major resistance point, go short. Tight stops must be used as well as small take profits. This allows the trader to capitalize on the bounce. There is usually at least a small bounce at major support and resistance points. It would be a good a idea to use a broker with a small spread for this strategy so the spreads don’t eat into your profits too much. This is a good forex strategy with a lot of potential, but be sure to try it on a demo account first.

Forex Hedging Strategy

A popular FX hedging strategy is to buy GBP/JPY and to simultaneously sell CHF/JPY. The goal is to profit from the interest rate differentials as well as the price movements. Currently a long GBP/JPY earns considerable swap interest due to the large difference between rates. You have to pay interest on the short CHF/JPY, but it’s considerably less than on the long GBP/JPY position. Typically a good ratio to use is 1.8 lots for the short CHF/JPY to every 1 lot of GBP/JPY. However, different amounts can be used.

It’s a good idea to leave enough margin in your account to weather at least a 1,000 pip swing against you.

This strategy does involve considerable risk because the currency pair CHF/JPY is not guaranteed to go in the opposite direction to GBP/JPY. However, it could be a lower risk method of taking part in the popular carry trade. This is potentially a very effective forex trading strategy.

Forex Arbitrage System

A clear arbitrage exists between mainstream currency trading brokers and spread betting forex brokers. The arbitrage situation exists because with spread betting you have the option to have your pips priced in different currencies. For example you could have a long gbp/usd position so that the pips are priced at £5 per point. To hedge we could use a short GBP/USD position with a normal forex broker, using 1 standard lot.

We will assume the starting price is $2.
If price moved up to $2.20. The short position would be $-20,000. The long would be

Forex Currency Trading Strategies And Systems

In this article we look at the different types of currency trading strategies and systems the forex trader can choose from before commencing their FX trading journey.

The Best Currency Trading System

There are many many different currency trading systems out there for sale, some even claim to be the best currency trading strategy ever! Unfortunately, these systems sold online rarely (if ever) live up to this bold claim. And the reality is, if these forex strategies were really any good, it is unlikely they would be for sale. The owner of the system would be using it to make money currency trading, instead of spending his time and possibly money marketing the strategy.

Carry Trade Strategy

The carry trade is an extremely popular trade in the FX Market. It is made possible by the fact that different countries have a different benchmark interest rate. At the time of writing this article, Japan’s benchmark interest rate was just 0.5%, whilst the benchmark rate for New Zealand was 8.25%. Interest rates fluctuate based on economic conditions. It is USUALLY the case when one benchmark rate is on an upward trend and another country’s benchmark rate is on a downward trend, the currency on the upward trend will appreciate against the currency that is on the downward trend. This is not a guarantee, but it is a common occurrence. Each time you buy a currency pair that has a positive interest rate differential, you will receive a credit each day for the interest rate differential. However, the reverse is true if the pair you are trading has a negative interest rate differential. For example, a long NZD/JPY position would receive a credit each day (also known as the swap) whilst a short NZD/JPY position would have to pay the negative interest daily.

Trend Trading System

As the name suggests, trend trading systems attempt to capture trends. Some forex pairs trend very well indeed in the long term. On that really springs to mind is EUR/USD. It has been in a long upward trend for many years, with few significant retracement, making many record highs along the way. In the forex market the trend really is your friend. Never open a long term position against the long term trend.

Forex Scalping Strategy

A Forex scalping strategy aims to profit from very small price movements. Scalping positions are usually opened and closed within a short time frame. It’s important to choose a broker with as low a spread as possible for when scalping to minimize the number of spreads the trader has to pay.

Forex News Strategy

There are many news trading systems out there. Many people attempt to trade the initial news spike after a data release. Price can move one direction very quickly seconds after a new release, leaving a good opportunity to trade. The move is often bigger if there is a surprise in the numbers. I remember a shock interest rate hike by the bank of england in January 2007. The pair GBP/USD rose around 150 in less than a minute!

If you want to trade news spikes it is important to have a very fast news feed that can get the numbers to you as quickly as possible, before the market moves. An example of a budget news feed is Tradethenews. Bloomberg and Reuters both offer professional news feed, they are not cheap though.

It also important to have a broker that has very fast execution around the news releases. Many retail forex brokers do not like news traders, so it is important to find a broker that best suits your needs. Due to the high volatility around the news releases execution on a live account is often very different to that of a demo account.

Automatic Forex System Trading

The idea of an automatic trading system that makes you lots of money and requires minimal maintenance is appealing to many for obvious reasons. The most common form of automated forex trading is the use of the platform Metatrader4. This allows the trader to create a piece of software that will trade according to a specified set of rules. Unfortunately, most of these systems do not stand the test of time. Some may do well in the short term, but very few indeed earn money long term. There are many of these automated currency trading systems for sale, often with a big price tag. Generally it is best to stay clear of these. The same line of thinking as mentioned above applies, if the strategy was making money, why would they be selling it?

Conclusion

In conclusion, the best online currency trading system is the one that suits you best. Many new traders have a day job and are unable to spend several hours a day trading, so some strategies may be unsuitable. For example, if your FX trading strategy was to profit from carry trades in the long term. You could just open a position and leave it alone. However, if you wanted to scalp the forex market, this would probably require a much bigger time commitment. Of course, you can use many different strategies to try and spread your risk out as well.

Forex Scalping Technique

Forex scalping is a trading technique that involves opening an FX position and closing it within a short space of time with the intention of speculating that price will move slightly in favour of your position before closing it, for a small profit.

Typically, forex scalpers make a very large number of trades and it is not uncommon for a scalping trader to make well in excess of 100 trades in a week.

Most traders who attempt to scalp the forex market fail rather miserably. This is because for the inexperienced scalper the odds are set well against them. I will demonstrate why this is below:

Let’s say a scalper wants to earn 10 pips by speculating that the price of GBP/USD (Cable) will move from 1.9990 to 2.00. Typically, with most retail the brokers the spread for this pair is 3 or 4 pips. In this example we will use 4 pips. We will also use a 10 pip stop loss.

If the scalper is correct and price hits 2 before the stop loss, he will earn the 10 pips minus the spread of 4 pips, a net gain of 6 pips.

However, if the stop gets hit, the scalper loses 10 pips plus spread, which nets -14 pips.

So in this instance, the winning trade made 6 pips net profit and the losing trade made a 14 pip loss. OUCH!

With this example the trader would need to win 70% of his traders to just break even!

The spread you trade with can massively affect the outcome with FX Scalping. In this above example, if the spread was 2 pips instead of 4 pips, the trader would only need to win around 60% of their trades to break even. A big difference.

Forex Broker for Scalping

There are many FX brokers out there nowadays, but many of them are unsuitable for scalping. Some brokers do not like their clients to scalp the forex market, whilst others have too wide a spread for it to be profitable. One broker that does not seem to have any objections to scalping is Oanda and their spreads about the lowest around. Some ECN Brokers may be suited for currency scalping, for example mbtrading.com. ECN brokers often have lower spreads, sometimes much lower, but there is often a commission fee to pay for each trade.

Scalping Forex Strategy

There are many forex scalping techniques used when scalping the forex market. Some rely on indicators whilst others rely on support and resistance. One simple scalping strategy I have tried personally is marking major support and resistance points on my chart and putting a limit order at them and try to catch a few pips on the bounce. It’s important not to be greedy with this strategy and just get a quick scalp.