Day Trading Fundamentals

Day Trading Fundamentals
Few Traders have caught on to perhaps the most profitable low risk
currency trading strategy in the world right now – trading the release of
reoccurring weekly and monthly economic indicators and also scheduled
news conferences and release of monthly minutes of meetings, interest
rate announcements and monthly bulletins.
I have been profitably trading news since the beginning of July and the
results have been phenomenal. Here is how it works.
I did the legwork and went back and documented the actual headline
number versus the consensus forecast for all U.S., Eurozone, British,
Canadian, and Australian scheduled economic releases, minutes of
meetings, interest rate announcements, and monthly bulletins, since the
beginning of the year.
When the actual is significantly different then the consensus forecast,
there is an initial 20 to 50 pip price gap, followed by an additional 50
points or more of directional move. The news itself seldom justifies the
extent of the move; what apparently happens is market perception shifts,
and both short term and long term traders are “going the same way”.
HOW TO STRUCTURE TRADES FOR MAXIMUM RETURN /
MINIMUM RISK
Practically all the FX broker electronic platforms guarantee fills at the
rate on stop loss orders. Thirty second prior to release time place a stop
loss order (orders) and adjust the entry level if necessary until release
time. There are two types of orders: 1) Targeted buy or sell. 2) Straddle.
Targeted buy or sell is used when you wish to enter the market if a
specific event occurs, such as the announcement of an unexpected change
in interest rates. A stop loss entry order is placed such that the order will
most likely only be triggered if rates or in fact changed.
For example, in July there was an outside chance Canadian rates would
be lowered. I entered stop loss buy USDCAD orders 15 and 25 points
above the current market just before the announcement. If rates are left
unchanged I cancel the orders immediately. Generally a small reaction
opposite my orders will occur as traders who were long USDCAD into
the announcement square up. Point is there is usually time to cancel
orders. In this case rates were lowered and USDCAD was 100 points
higher in seconds (I was long USDCAD 85 and 75 points below current
market).
A more recent example; release of minutes of U.K. policy committee
meeting on Wednesday October 22nd; if vote on holding rates steady was
close, market would buy GBPUSD and sell EURGBP. Turned out to be 4
and 4 and the head of the committee cast the deciding vote to hold rates
steady. When this news hit the wire GBPUSD took off. I was able to get
long GBPUSD at 1.6750 by having a stop loss in the FX brokers. Market
traded to 1.6790 in a heartbeat and proceeded to 1.6930 by days end.
Later in the day Canadian retail sales and leading economic indicators
were due out (GMT 12:30). Market was looking for weak numbers;
USDCAD was sitting 20 points off multi year low. The USD was getting
chopped up elsewhere, especially against GBP and EUR. I entered stop
loss orders 10 points below market price just prior to news release; my
thinking was if the numbers were pretty good the lows in USDCAD
would be taken out because the flipside – USD – was tanking. Numbers
were pretty good – USDCAD collapsed.
There are trades similar to this almost everyday in one of the major
currencies. When I am wrong, most times I can pull my order and lose
nothing. Sometimes the number is just slightly good enough or bad
enough to trigger my entry; in those cases (rare) I am stopped out for a
10-point loss – worse case basis.
With a risk/reward ratio of 10 to 1, it is easy to imagine the potential
here.
2) Straddle
When the USD is sitting on the fence and a sudden wind (news release)
will determine direction I enter orders on both sides of the market to enter
if a scheduled news release is a surprise – significantly different than
consensus forecast. There are many indicators that are notorious for
coming in far away from consensus forecast – monthly unemployment,
retail sales, and durable goods to name a few. Unemployment and retail
sales are important directional indicators; as such, when the consensus
forecast is way off a price adjustment in the USD occurs. What’s key is
that the price adjustment is usually a lot more than what would be
expected based upon the forecasting error. What’s even more ludicrous is
that the government agency releasing the news states on their website that
the forecast can be off. Retail Sales for example; the government
acknowledges it can be 1.5% over or under; they call it statistical error.
Doesn’t matter. Fact is there is usually a big move in the USD when these
numbers aren’t close to forecast – and that ’s about half the time.
The straddle trade risk is 24 points. For example if EURUSD is 1.17 80-
84; a sl sell at 1.1770 and sl buy at 1.1794 are entered. Once one side is
triggered, the stop loss is moved to 10 points and then breakeven as soon
as practical to do so. As a general rule once the position has 5 points
profit the stop is moved to 10 points from entry and then to breakeven
when a 15 point unrealized profit is reached.
WHAT CAN GO WRONG
1) Scheduled Economic release: Headline number good, revision
bad (and visa verse)
2) Minutes, Monthly Bulletins: Good stuff and then bad stuff;
similar to above.
BOTTOM LINE
The new frontier is on-line FX brokers; they honor stops at the price – at
a price – when your level is reached your done. For example a 1.1790
stop in EURUSD is done when market reached a low price of 1.1790-94.
This is where they get you. In addition they can mess around with the
spread and stop you out. For example, interbank may be at low of
1.1790-92; they jack in 1.1786-90 and stop everyone out to 1.1786. Not a
problem with news trades as market usually gaps anyway.
There are other ways to take advantage of news trades; such as repeatedly
refreshing the government website that reports the news starting 30
seconds before scheduled release. Sometimes the news hits a little
early… and I hit a few bids (haha).
Although the strategy does best with guaranteed stops, the results would
still be good without guaranteed stops. However, the risks would be
greater. Since I have never been a fan of risk I prefer to enter orders prior
to news release.