What is a popular strategy for short-term forex traders?

For many traders, trading key announcements is seen as an opportunity to profit quickly due to the volatility that surrounds these events. One such event that is popular with traders is the US non-farm payrolls. This occurs on the first Friday of every month. The non-farm payroll is the measure of how many new jobs have been created in the US in the preceding month. It is called non-farm payroll because farming related jobs are not included since they are seasonal and therefore can skew the numbers depending on the time of year.

So let’s look at a strategy to take advantage of such an event. One such strategy is for the trader to open two positions on either side of where the market is trading. The basis for this decision is that should the announcement be significantly different from the market expectation it will result in the market moving considerably in one direction or the other.

Let’s assume that the trader wishes to take advantage of this possibility and decides to trade the euro against the USD. Let’s also assume that the EUR/USD is currently trading at 1.4200/03 ten minutes prior to the announcement. At this time the trader may look at placing a limit order to buy euros at 1.4215 with a stop loss at 1.4200 and a take profit at 1.4265. At the same time he places a limit order to sell euros at 1.4185 with a stop loss at 1.4200 and a take profit at 1.4135. Both these limit orders are known as stop limits and it should be noted, that both these orders are independent of each other and will not result in an open and closed position should just the stop limits be triggered. (In other words, if the market does drop to 1.4180 and the sell order is triggered and then the market rises to 1.4220 and the buy order is triggered followed by the market trading at this level only, it will not result in an open and closed position and therefore a loss of fifty pips. Instead the trader will have both a buy and sell order for euros in the market. He will have to close both the buy and sell order independently of each other).

It’s now 12.30 GMT and the announcement is made and it results in the market dropping from 1.4200/03 to 1.4150 and continuing to trade at that level. The outcome for the trader is a sold position at 1.4185 and an unrealized profit of fifteen pips. He also has a limit order to buy that should be cancelled. If the market continues to trade lower he can either adjust his take profit or allow his trade to be closed.

Now all of this sounds simple but in fact this strategy results in more losses then gains. Why? Well simply put, the strategy is based on the actual result of the data announcement being significantly different from the market expectation. If it is not then the market may not behave in the manner that the trader expects. If for example, the announcement is made and the market drops to 1.4185 resulting in the sell order being executed and then rises to trade around 1.4210, the trader would have lost fifteen pips without any opportunity to profit from the strategy. Therefore it is incumbent on the trader to amend or cancel their orders quickly should the actual result be aligned with the market expectation. I therefore recommended that only experienced traders look at utilizing such a strategy.

Robert Francis, General Manager, Easy-Forex

Disclaimers: The views expressed in this article are those of Robert Francis, a representative of Easy-Forex and is not intended as general advice. This does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.