How to Handle an Open Forex Position Prior to Major News
04/02/2010 12:01 am EST
Today, I’ll discuss how I handle an open position when a major news announcement is approaching. Please note that this strategy is catered specifically to the trades I post on FX360.com. There are probably some strategies where this exact plan wouldn't be ideal. However, this information should at least show the importance of having an idea what to do with a position when there is about to be a major news announcement. Also, keep in mind that only major news announcements are relevant for this matter. I would take no action if an announcement with low or moderate impact was on the horizon. Also, we only care about announcements that pertain to the specific currency pair. In other words, a big EUR announcement wouldn't make me alter my USD/JPY position.
Why do we need to worry about news announcements when we already have a position, and we already have our stop and profit target in place? We worry about this because a major news announcement can move the market a great deal. Our examples below will show how these announcements can create more risk than normal.
Scenario One: The Position Is Currently Not Profitable
In scenario one, we generally will leave the position on. There is an exception to this rule. If the trade is 90% of the way to the stop (e.g. 50-pip stop and within five pips of stopping out), we will just close the trade. The reason for this is the concern that a big move against us could create a gap. If the gap goes past our stop, then we could lose more than we were willing to risk. Otherwise, we will leave the trade on and see what happens.
Scenario Two: The Trade Is at Break Even
In scenario two, we generally will leave the position on. However, there are a couple of exceptions. First, if you think there is a chance the news could gap beyond the stop, then get out. This is rare, but could apply to short-term traders. Another reason to get out is if the original pattern no longer seems valid. If the original reason you put the trade on is gone, it makes no sense to stay in. This doesn't pertain to the FX360 methodology because the trades are well planned, but it could definitely happen with less-defined strategies. Hopefully this isn't common for you.
Scenario 3: The Position Is Currently Profitable
Scenario three is the most difficult situation to handle of these three scenarios. The others you generally leave on and hope the news reverses your fortunes and books you some profits. In the first scenario, the trade is more likely to be stopped out regardless, so at least you had a shot at a cheap win. Scenario two happens very infrequently. But Scenario three is tricky. If the pair is 50% to the target or farther, I think it is best to just get out. The reason is that you could go from a near winner to being stopped out in an instant. However, there could also be some subjectivity in that level depending on how much you think the announcement could move the pair relative to the size of the pattern. The main thing is that you don't want to go from a near winner to a loser in a short amount of time. For me, this is more of a psychological philosophy, but it also is about risk/reward. You are risking a lot if you are 50%+ to the target for relatively little gain, and it would be based on a random news announcement that could neglect technical levels in some cases.
And that is what it is all about: Risk versus reward. A news announcement represents a move that is generally random, rapid, and large. Therefore, you have to ask yourself questions like “If I had a 50/50 chance of the pair moving up 30 pips or down 30 pips, would I take it right now?" That is a very basic example, but that is the general thinking behind the strategy I prefer to use. This is a grey area that will generate a lot of different thoughts I am sure. The easiest method is to ignore the news once you enter, but I think by following the criteria listed above, results will be improved when you have a position in the market as a major news announcement is on the way.
By Bradley W. Gareiss of GFTForex.com