In this strategy, the trader wants to
participate in the news breakout but doesn’t want the risk of
prediction and the costs of waiting to decide direction. This
strategy means you are buying
and selling the currency pair at the
same time. As soon as the news breaks out, a decision has to be made
as to which side to get out of. Should it be the winning or the
losing side?
The first tactic is to get immediately
out of the losing side. This may cost you 20 pips or more on a strong
move, but it also means you’re in on the winning side. So the price
for the ride depends on how quickly you can get out. Getting out of
the loser first follows the logic that at the break of the trade
there is maximum momentum, and being in at this point is, in fact,
the best time to be in. This strategy works well when there is a big
move.
Figure shows a classic breakout in
response to positive dollar nonfarm payroll news release. The hedge
strategy would have worked out, with the loss of about 20 pips on
buying the EURUSD, offset by a gain of up to 60 pips with buying the
USDCHF. Few traders could get the maximum gain out of this kind of
move and would more probably achieve a 15- to 25-pip move in about a
15-minute period.
Getting out of the winner first is a
variation of this strategy. In other words, keep the loser and get
out of the winner because the first minute is when there is maximum
energy. Then manage the losing side. The idea is to wait for a
retracement on the loser. This strategy can backfire; if there is a
small move on the news, both sides can lose.
News trades can occur on any currency
pair because all countries have key economic data releases. There are
many hedge combinations for trading news that affect currency pairs.
The same principle of going long and short at the same time applies
(see picture). Some forex firms now allow hedging in the same
account. Other firms allow the creation of a subaccount. For example,
one can buy EURUSD in one account and sell the EURUSD in the other
account. But when this is not permitted, there are other ways to
employ a hedge strategy. If one is doing the EURUSD news and buying
also the USDCHF, there is a pip differential. The EURUSD moves $10
per pip (per $100,000), and the USDCHF will vary. To obtain an actual
hedge, one needs to rebalance the trade. For example, if a trade were
put on when the USDCHF was at 1.22, it would move $8.20 per pip. So a
trader doing a hedge would trade 10,000 for the EURUSD and 12,500 for
the USDCHF to balance out the move.
The trader will find that the
implementation of these news trading strategies may vary, based on
the forex firm involved. One should test them out to determine if a
great deal of slippage occurs at the firm you are considering.
 |
Playing Both Sides at the Same Time
(the Hedger News forex strategy)
|
Post a Comment