Abstract

Many traders avoid trading on days of important news. It is true that the market in these times is much more volatile, making it really unpredictable. But is that the best is not trade these days or try to take advantage of these features of the day’s news. In this article we can see a strategy to take advantage of volatility in periods of news.



The News


The forex market can be very volatile in the short term. Although the currency pairs follow sometimes clear trends over long periods of time, but in the intraday the currencies react very quickly to the unfolding news. It is essential to know what news has more impact and sources following to profit in forex world.


In this picture we can see the Dukascopy Economic Calendar [1]

- What news is most important in forex trading?

Not all the news has the same impact, some are followed more closely than others simply because they have more influence on the appreciation of some currencies against the other. In general we can say that the main economic indicators are always important:
  1. Gross domestic product (GDP) and its rate of quarterly or annual growth;
  2. Inflation rate;
  3. Interest rates;
  4. Unemployment rates.
These indicators are announced by the entities responsible for each country, they are official and credible numbers. In most cases, investors know in advance when that will be announced and what values are expected.

There are several other leading news that deserve constant attention of investors. Knowing how to choose those with more meaning is one of the most important parts for a correct strategic definition in the forex market. Of the many news currently available, in addition to those mentioned, we note the following:
  1. Retail sales volume;
  2. Consumer price index and producer;
  3. Number of sold new homes;
  4. Number of used homes sold;
  5. ISM Index: An index that analyzes hundreds of industrial companies and measures levels of employment, inventory levels, orders and sales
This chart show one of the most important news impact, the NFP. The last value was knew this month on October 7th and the pair EURUSD made a move of almost 90 pips during the news period.


This chart show the market movement when a new has no big impact. The pair EURUSD made a move of 25 pips only during the news period.

- News with more impact

As the most of traders knew, the news that has most impact on forex market, particularly in USD, is the so-called "non-farm payroll"[2] (NFP). It is a statistic about the number of active workers in the United States who receive a salary, excluding workers in the agricultural sector, the state, domestic and non-profit organizations. Whenever this indicator is announced, we expect volatility between 70-100 pips, which occurs almost immediately.

Why is NFP so important?
Because it tells us instantly if the United States is creating jobs and it has a great importance for economic growth, consumption, investment and corporate profits. The increase in the number of employees leads to an increase in consumption, which in turn pushes inflation and leads to more restrictive monetary policies (ie leads to higher interest rates).
So a NFP value above expectations is a leading indicator for the appreciation of the USD.


This figure represents the NFP values in 2016

The NFP dates in the second semester of 2016
  1. July 08
  2. August 05
  3. September 02
  4. October 07

NFP news period Volatility

To better understand the volatility in periods of NFP news we will review the one-hour bar for 12h and 13h in the months of September 2016 for the instrument EUR / USD.
The parameters under consideration are:
  1. Bar total length (btl)
  2. Bar total up length (btul)
  3. Bar total down length (btdl)

Analysis for the 1Hour bars in September at 12h and 13h
  • 12h


  • 13h

In these graphs we can see that there are almost 12h differences in the size of the bars in relation to other days. Turn to 13h is when we highlight the major differences in line with the NFP reporting period.

Analysis for the 4 Hour bars

As we can see the 4 Hour bars have bars with long up or down tails. This kind of bars is profit with not follow strategies.


The strategy


The proposed strategy is based on the fact that in news period generally be an inversion of the initial trend. In these situations we can use a not follow trend strategy taking limits as the highest value of btul (Bar Total length up) and btdl (Bar full length down) of 4h bar that occurs in the NFP.

As we can see in chart of 1H bar of 13h, where stands a greater difference between the size of the bar in proportion to the rest of the days of the month. Then it will be this time that we start our negotiations.
Our SL will be placed 10 pips below the greater of btul and btdl

SL = maxim (btul, btdl) – 10
We put our SL below maxim (btul, btdl) for we force the release of the order in the opposite direction.
Our TP will be 20 pips (less than the minimum value between btul and btdl)

The strategy is to open an order at 13h to follow the trend of the last bar (12h). In this way we try to take advantage of the initial trend that generally follows the 12h bar.

If the order reaches the TP then stop negotiating and go out with a positive result.
If the order reaches the SL then is launched a new order contrary to the direction of the initial order and in this case the SL will be maxim(btul, btdl), TP will be equal to the maxim(btul, btdl) adding 10 pips and the amount will double the previous order (thus making martingle [3]).

So, the orders are:

  • First order:
SL = maxim (btul, btdl) – 10
TP = 20
Direction = follow the last Hourly 12H bar
  • Second order:
SL = maxim (btul, btdl)
TP = maxim (btul, btdl) + 10
Direction = not follow the last Hourly 12H bar
Amount = amount of initial order * 2;


Conclusion

Many traders choose to stay out of the market on news periods. However these periods usually take place the two most desired situations by traders: volatility and liquidity. The markets in this period still have the particularity of being intermittent thus making it suitable for not follow strategies based on Martingle. In this article we were presented the theoretical foundations and an implementation approach. In the next article a possible implementation in Jforex of this strategy will be presented.


References


[1] https://www.dukascopy.com/swiss/english/marketwatch/calendars/eccalendar/
[2] http://www.investopedia.com/ask/answers/06/nonfarmpayrollandforex.asp
[3] http://www.investopedia.com/articles/forex/06/martingale.asp
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