As we saw in previous lessons, the publication of news can cause high volatility in forex and wide movements in the price of a currency pair, a fact is seen as a great opportunity by many and as a high-risk situation in the market to get away from many others.
Everyone can have their own strategy to trade the news, here we will expose two of the trading techniques to trade the most popular and widely used news: “Straddles the news” and “Trade the number”. The fundamental, and important, difference between the two is that Straddle’s strategy does not take into account the actual outcome of the news, while Trade the number waits for the outcome of the news to take action. Let’s look at both strategies in a little more detail.
Straddles The News: Positioning on both sides before the news
The straddle is an English transitive verb whose literal translation into Spanish is somewhat complicated but it means something like “astride, spread out on both sides.” From the very meaning of the word, we can deduce what the strategy consists of: placing pending orders on both sides of the current price moments before the publication of the news so that when the result of the news triggers the price to one of the sides, our order in the right direction.
Straddles The News is a very easy strategy to set up and execute but it is also probably the riskiest news trading technique. To straddle, find out the time of publication of an important news, connect your platform moments before and place a pending order to go long a few pips above the current price and another a few pips below to go short. If the result of the news creates enough volatility, your orders will be executed automatically as well as your stop loss and take profit levels. The idea is that if the market moves up after the news your pending buy order is executed and you cancel your pending sell order. It sounds easy, right? Well, it’s that easy but remember the associated risks that can cause the two orders and their corresponding stop loss to be executed, ending the two operations in losses in the blink of an eye: widening the spread, high volatility with sudden movements to both sides, slippage, etc.
Trading the number: trade in the direction indicated by the result of the news
This trading strategy for news seems to be preferred by many as it has a lower risk when straddle. As its name indicates, the strategy consists of knowing the result of the news and entering the market in the direction that this result marks.
The first thing to do with this technique is to know the importance of the news as well as its meaning and forecasts. The second thing is to wait to know the result of the news, assess the deviation with the forecast, and operate according to this deviation. If the result of the news is in accordance with the forecast, there will not be an exaggerated movement, if the result has deviated enough from the expected data and it is a good figure, the currency of that country will have to be bought, if on the contrary the data has been bad and surprising (deviated from expectations) will have to sell the currency of that country.
Let’s take as an example that you are going to trade a monthly unemployment report and that currently the employment situation for the country in question is very important given its political-economic situation. The forecast is that performance will increase as it has done in previous months. The time has come for the publication of the number of unemployed in the country and surprise! unemployment has decreased and a few thousand jobs have been created. The market will react in favor of the currency of the country in question, if for example it is the United States, the EUR / USD pair will fall (favorable for the USD).
As you can see, Trade the number is a strategy with less risk than the straddle but that requires a bit more experience and training.