Trading forex news releases requires a tremendous amount of composure, preparation and a well-defined strategy. Without these qualities, traders can easily get swept up in all the excitement of a fast-moving market to their detriment. This article provides useful strategies on how to trade forex news during a major news release.
Other articles in this series:
Forex News Trading Strategies
There are two common strategies for trading forex at the news release:
- Initial Spike Fade strategy
- News Straddle strategy
Each one provides a robust plan for traders to follow, depending on the market environment observed at the time of the release, and how best to approach that particular market.
Before reading further it is essential that you have a good grasp on the basics of news trading. If you are new to trading or simply require a refresher, take a look at our introduction on how to trade forex news.
1. Initial Spike Fade Strategy
This strategy looks to capitalize on an overreaction in the market over the short term by fading the initial move. This strategy suits reversal traders, scalpers and day traders due to fast moving and erratic pricing that often follows a major news release.
Overreactions and subsequent reversals are seen fairly regularly in the forex market as large institutions add to the increased volatility of the initial move. The market as a whole, often spikes as an overreaction and subsequently push price back toward pre-release levels.
The shortfall associated with this strategy is that the initial spike may turn out to be the start of a prolonged move in the direction of the initial spike. This underscores the importance of using well-defined stops to limit downside risk and get you out of a bad trade quickly.
How to implement initial spike fade strategy:
- Select the relevant currency pair: Ensure the major news event corresponds to the desired currency pair to trade, i.e. Non-Farm Payrolls will affect USD crosses.
- Switch to a five-minute chart: After selecting the desired market, switch to a 5-minute chart just before the news release.
- Observe the close of the first five-minute candle: The first five-minute candle is usually quite large. When price approaches either the spike high or the spike low, fade the move by trading in the opposite direction.
- Stops and limits: Stops can be placed 15 pips above the high for a short trade or 15 pips below the low for a long trade. Targets can be set at two or three times the distance of the stop.
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