How to Trade FX News with Order Types

09/19/2012 7:00 am EST

Focus: FOREX

Walker England of DailyFX.com explains how currency traders can take advantage of market-moving news events with a specific type of order.

Trading consolidation patterns prior to a news event, such as Euro CPI, does not have to be a difficult proposition. The EUR/AUD daily chart below is a prime example.

The first key is to trading this chart is to identify the area of consolidation on our chart by finding support and resistance. Currently, price has found overhead resistance at the conclusion of a standing 787-pip uptrend.

Moving down the chart, we can see a line of resistance formed by connecting the September 5, 12, and 13 highs. An ascending support line can also be drawn by linking the wicks from our September 7 and 12 lows. Once we have found these two charting lines, we can extrapolate them to form a triangle pattern and identify entries using OCO orders.

chart
Click to Enlarge

Once a consolidating pattern such as a triangle is found, our trading decisions become much easier. We can either wait for price to break out of its existing holding pattern, or trade between support and resistance.

With news events potentially creating market volatility, a breakout strategy may be the preferred plan of action for traders. Breakout entries should plan to prepare for the collapse of one of our support or resistance lines previously drawn on the graph.

Setting entry orders can be an advantage to a trader during a news event. If you are unsure where the market is going to break, both buy and sell orders can be placed through an OCO entry.

OCO (One Cancels the Other) will enter into the market with a long position on the break of resistance of a short position with a break of support. Stop orders can be placed in between the OCO entries prepared to limit losses on the return of prices back inside of previous support and resistance levels.

chart
Click to Enlarge

My preference is to set an OCO order for a potential breakout on the EURAUD currency pair. As mentioned, entries may be placed outside of current highs and lows. Stops should be placed in the center of our consolidation pattern near 1.2320. Limits should look for pricing targets of over 160 pips or more to create a clear 1:2 risk-reward profile.

Alternative scenarios include price continuing to trade inside of the triangle prior to a breakout.

Walker England is a trading instructor at DailyFX.com.

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