Trading Non-Farm Payrolls with Currency

08/02/2012 3:00 am EST

Focus: STRATEGIES

Wayne McDonell

Chief Currency Coach, FX Bootcamp, LLC

Wayne McDonell is a professional Forex trader with an entrepreneurial spirit.  He coaches new forex traders and conducts webinars at various forex-related websites. 

Here, we talk about how he trades the EUR/USD around "non-farm payrolls" announcements, what time frames he looks at for trading opportunities, and how he sets his stops and profit targets.  We also discuss how to determine how much to risk with each trade, and why standardizing that across every trade is a good idea.

 
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NEXT: Read and/or Download the Complete Interview Transcript

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Tim Bourquin: Hello everybody and welcome back. Thanks very much again for joining us for an interview on this site or on your iPod, wherever you may be listening here today.

As usual, we are going to be interviewing a trader to get an idea of how they look at the markets, their overall philosophy of trading, and ways that they find opportunities in the markets each day—hopefully, the point being, to give you something to think about in your own trading, and maybe one or two points to think about the next trading day when you are sitting in front of your computer hoping to find opportunities for yourself.

Our guest today is Wayne McDonell, and he is the Chief Currency Coach at FxBootcamp.com. He has spoken for us at the Traders Expo, at a Forex Trading Expo, and is a Forex trader himself. So we are going to talk to him about some of the things he talks about.

He does some things at FXstreet.com, including some sessions about how to trade the non-farm payrolls announcements in Forex, so we are going to talk to him about that and some other things as well. So Wayne, thanks very much for joining us on the show today.

Wayne McDonell: Thank you, Tim. It’s a great honor and a real pleasure speaking with you today. Thanks for having me.

Tim Bourquin: Sure. So how long have you been in the Forex trading business?

Wayne McDonell: I’ve been trading Forex for about five years.

Tim Bourquin: Okay, so back when you started, kind of like when I started as well in doing this, it was really the Wild Wild West out there, wasn’t it?

Wayne McDonell: Yeah. It was pretty crazy. You know, it was pretty crazy, but at the same time very attractive.

Tim Bourquin: Now, what has kind of been your specialty? I know I mentioned you do the non-farm payrolls announcements. Do you like trading Forex around the news that comes out?

Wayne McDonell: Well, as a currency coach, my goal is to kind of keep people away from risk and try to help them survive being a currency trader. And I find right around news events, obviously risk increases; the markets become very volatile as new information hits the market, and well, I try protect people from that.

You can’t avoid trading news in Forex, but what I do is try to help them survive it by, first of all, understanding what is happening, but second of all creating a trade plan around that news event.

Tim Bourquin: OK. Now, a lot of people I know avoid that time altogether. I mean, non-farm payrolls tends to move markets quite a bit. Why is it that you like this area so much that you want to try find ways to actually trade because of it?

Wayne McDonell: Well actually, I totally agree with the people that say that they want to avoid it. What I used to do the first Friday of the month during non-farm payrolls is go golfing—that was my golfing day.

But there are lots of people that are attracted to non-farm payrolls, especially the amateur traders. So I thought by working with FX Trade to coach during the live markets, again, I can help them through that process of learning how to trade.

Tim Bourquin: So give us some tips to begin about non-farm payrolls. Can you give us some examples of maybe some previous times and things, and what you’ve done, what opportunities you found, and how would somebody go about starting out approaching this?

Wayne McDonell: Well again, non-farm payrolls is a unique time. It’s the biggest day of the month, where the markets move the most. A lot of new amateur traders have bought a book off eBay or something for a buck and it has taught them that they can make $10,000 in ten seconds.

So my job as a coach, I feel, is to hold their hand through the process of the non-farm payrolls coming out and teaching them that, “Okay you’re taking on risk. Here are the things that are happening. Here’s the things that’s leading up to non-farm payrolls and then here’s how to survive.”

And, again, the way to survive is not just understanding what’s happening, but creating a trade plan around that. So I use various techniques to teach people in this live market.

But the bottom line, it seems like at least half the time we don’t trade at all, and that’s the secret to success: realizing that when risk is the greatest, that’s the best time to just walk away or step aside and wait till the markets calm down and you get a conservative repeatable trade setup. That doesn’t always happen with non-farm payrolls.

Tim Bourquin: And is the idea to get into a trade before this announcement comes out, or wait and see what happens and then trade the opportunities that arise from that after?

Wayne McDonell: I’m a big fan of setting a trap for price, so I don’t guess. But I’m a very, very conservative trader.

I do allow the announcement to come out and then I take a few minutes, usually a five-minute candle. I let it close. I use that first five-minute candle to identify support or resistance, and then we usually trade either a break or a bounce at that level.

Next: Currency Pairs

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Tim Bourquin: And what currency pairs or pair specifically do you trade in this time?

Wayne McDonell: Well, as a coach I like to look at what is most liquid, and that’s almost always the EUR/USD. But when non-farm payrolls comes out it’s a USD trade. It’s always going to be about the US dollar. The US dollar is the reserve currency of the world.

The whole world is watching that news announcement because the employment situation in the United States is really going to dictate the health of the economy overall. So everyone, no matter what currency pair you are trading, if there’s a $ symbol in that currency pair, the USD is going to be driving what happens.

So I watch the EUR/USD but you could be watching the pound, you could be watching the Swissy, you could be watching the yen. As long as there is the USD somewhere in that currency pair, it’s the USD that I’m watching. But since the EUR/USD is the most liquid, it behaves closer to expectations.

Tim Bourquin: Okay. So when a non-farm payrolls announcement is coming, do you try to determine what that’s going to be, and then place trades whether you’re right or wrong? Or are you just—we know it’s happening, we wait till it happens, we watch that first five-minute bar and then decide from there?

Wayne McDonell: I decide based on what happens after the announcement comes out. So we look at the number, and sometimes I can go back in the past, I could look at databases, and find out:

  • “Well, where has this been leading to?”

  • “What was the expected number?”

  • “What was the differential between expected and actual?”

  • “Is there a pattern here?”

  • “Is there a trend between all these non-farm payrolls announcements?”

  • “How big was the revision?”

  • In a certain scenario when a number came out similar to this, “What was the range that occurred because of that number?”

But by and large, literally we just watch the charts and trade it technically. It is an intraday basis trade. In this case, we are even just watching a five-minute candle.

So wherever that candle closes, it’s going to identify the closest level of major support and resistance. Sometimes it’s identified by the wick, sometimes it’s identified by the close of the real body. But in any case, wherever it stopped and hesitated, that’s going to be a key level to watch.

 If it’s going to reverse there, certain candlestick patterns, certain moving average crossovers will occur that will allow us to maybe trade at that rejection, at that level. Or more likely than not, you’re going to get a breakthrough and we’ll trade a breakout.

But I must admit non-farm payrolls is absolutely risky. It can be very aggressive as far as potential for fake outs and whipsaws, and all these things that will catch an amateur trader off guard.

By and large, at least half the time we do not get a conservative repeatable trade setup from the non-farm payrolls. And if we do, it usually occurs quite a bit after the news announcements, after what I call “undo volatility.”

Once that volatility settles down, and things get back to normal, and we’re not trading off a motion but off of technical analysis, then the conservative repeatable trade often we’ll set up 30 minutes or maybe 60 minutes after the release has actually been put out into the market.

Tim Bourquin: And do you find that there’s any difficulty or challenge getting executed around those times of high volatility? Or have you not had that problem?

Wayne McDonell: Well, that is a major concern to a lot of traders, especially amateur traders because they’re assuming a lot of risks.

Now, first of all, Forex is definitely, definitely a risky market. But then you have this additional risk of what you mentioned “broker execution,” where you pull the trigger and you sit there for—I don’t know—5, 10, 15, 20 seconds just to get your order filled.

And since the market is moving so fast after non-farm payrolls, that could be a lot of pips where you’re putting in quite a bit of ways from where you thought you were going to be entered. Or if you had a stop loss in the market, sometimes the market will move so fast, it will jump right over top and not trigger your stop.

So you have this additional risk that you never see anywhere else. It only occurs around non-farm payrolls. But I tell you what Tim, if you wait five minutes, that risk diminishes exponentially. And so five minutes, ten minutes, a half an hour after non-farm payrolls, I don’t think you’ll have any problems.

Tim Bourquin: This doesn’t sound probably like somebody that is very new to Forex really dealing with, it sounds to me. It sounds like you need to have some experience of trading some relatively calm markets before you try to jump into something like this. Is that true?

Wayne McDonell: Oh, without a doubt. In fact, I think the more that you learn how to find a conservative repeatable trade setup on a daily basis, every single day, you won’t need non-farm payrolls.

Non-farm payrolls will be boring to you because you’ll see non-farm payrolls not as an opportunity to get rich quick, but an opportunity to get a large drawdown against your very nice monthly performance, growing your account slowly over time looking for conservative trades.

 So your No. 1 concern as a professional is you don’t want to blow through your profits doing something stupid and something stupid is likely to happen during non-farm payrolls. So I think the more experienced you get and the more consistent you get in your daily trading, the less you’ll even want to trade non-farm payrolls.

Next: Entry Points and Exits

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Tim Bourquin: OK. Now let’s talk about some entry points and exits and where you try to find those when you’re not talking about news events like non-farm payrolls announcements.

Are you purely a technical trader outside of those big announcements? And are you looking for specific setups that you’ve found work for you?

Wayne McDonell: Well, sure. I coach on an intraday basis. So that means we’re looking at 15-minute candles. But I’m dropping down to the five-minute chart. I’m popping it up to the hourly, the daily, but by and large we’re trading on fifteen-minute candles.

When I’m in the live market, I can’t help but be a technical trader. But I spend a lot of time talking about the fundamentals, putting the fundamentals into perspective, but on an intraday basis you have to be a technical trader.

 I look for conservative repeatable trades. And to me what that is, is a setup that is likely to produce 30 to 45 pips on that move. I hate suffering through retracements.

I’m not trying to make a million dollars on every trade. I’m just simply looking for a trade that is likely to set up 30 to 45 pips. Now out of that, because I am a very conservative trader, I’m looking for at least 15 pips out of that. That’s my minimal acceptable performance.

I usually look for opportunities to trade around the open of the session or a close of the session. So that could be the New York open. You get a trade opportunity and then the London close a few hours later. You usually get another trade opportunity.

Tim Bourquin: And in terms of the stop losses, what are you comfortable with in terms of the number of pips and finding that place that you’re comfortable enough, that you’re not going to get stopped up but that is an acceptable drawdown if you’re wrong?

Wayne McDonell: Well, what I’d like to do is try to make every trade as similar to each other as possible. And the way that I do that is I look at the size of the trade account and I always risk the same amount by adjusting my lot size depending on where my stop is.

If I can do this, this will help reduce the stress level because every trade will be very, very similar. You’re always risking the same, so a trade is a trade is a trade. The variable here is where do you put your stop-loss?

So a stop-loss could be behind a moving average, behind a pivot point, behind a swing high or a low, and the more these things that you have, the stronger and less likely that your stop will ever be hit. But then that variable could be—well, sometimes your stop loss might be 20 pips away; sometimes it could be 45 pips away.

So you need to look at that, put your stop logically, and then look at that and say, “OK. Well, my stop needs to be behind this pivot point and I want to get it behind the swing low. OK, that’s fine. That seems safe there.”

You calculate the pips from your entry and you say, “OK. Well, that’s 33 pips.” And then you calculate how many lots can you afford to trade if you’re risking X amount on every trade account? For some new traders, that might be as high as 5%. For traders who have been trading for a while and growing their trade account, they’ve ratcheted it down their risk, and they might only be risking 1%.

But whatever that percentage of risk you have in your overall trade plan is, if it’s 1%, 2%, 5%, you’re adjusting how many lots you’re putting on each trade based on where your stop is, and your stop is going to be based on what the charts tell you.

So one thing kind of leads to the other, but at the end of the day all the trades are the same amount of risk and you’re not sweating bullets by having too much risk on one particular trade at a time.

Tim Bourquin: Yeah, and I guess that eliminates having to think about the dollar amount of risk on every single trade if it’s different. If you just say it’s going to be this one thing, it’s one less thing you have to determine or think about every time you go into a trade, which I guess is important too.

Wayne McDonell: Oh yeah. Well, not only does it reduce stress, but because you’re putting consistency into your trading, your confidence starts to build. And at FX Bootcamp we never talk about money. It’s always about pips. So money should be irrelevant.

Money always takes care of itself in Forex because you could always add more money. There’s $2 trillion a day in Forex, so money is not the big thing. But being able to—what I call “Minimal Acceptable Performance,” is having a daily goal or even a goal for every trade plan that you put together.

And as long as you’re keeping that consistent, even if it’s only 15 or 20 pips at a time, that really adds up to something, whether you start with a thousand bucks or a hundred million—if you can’t get the ten or 15 pips over and over and over again, the amount of money you start with is totally irrelevant.

Tim Bourquin: Now, you said you like to get 15 pips out of something that maybe moves 30 or 35. Are you also determining that target, that profit target point, and selling right when you get to there, too? Or are you leaving that more open?

Wayne McDonell: No, no. We definitely identify entry points and exit points based on very logical and technical areas. It might be a Fibonacci extension overlaid with a pivot point which also happens to be a double top; that’s going to be an obvious area of hesitation for price, and hey, I like to take pips off the table. So yeah, we definitely do that.

Now, when I coach live and people see this either at FX Bootcamp or at the FX Street webinars that I do live, I talk about technical analysis, I talk about fundamental analysis, I teach people what’s happening in real time, but I never tell them when to pull the trigger.

So it’s all about understanding what’s happening, what could be a great entry point or what could be a great exit point if certain things come together? And that’s teaching people how to do the analysis themselves. And I project these entry points and exit points sometimes an hour or two in advance.

Tim Bourquin: Wow!

Wayne McDonell: So I say, “Well, you know, in this scenario this could be a possible bottom. And if it is a bottom you’re going to watch the caustics cross, you’re going to see price hesitate, then you’re going to see the nasty histogram start heading up. And therefore, that might be a sign that that support level is going to hold. If it’s going to hold then you might want to look for a break at this new level of resistance.” And I do this well in advance.

But when price actually gets there, I go quiet. And the reason for that is pulling the trigger is the most important part of the learning process. You can understand technical analysis but still be a terrible trader.

Tim Bourquin: I think that’s absolutely true, and I guess that puts the onus on them to hit that execute button, where if somebody is saying in a chat room, “Do this now,” they will build that confidence to make that happen the next time, I guess.

Wayne McDonell: That’s right. And I want people to be able to trade as professional Forex traders without me. I’m just a guide, a coach to teach people, and there’s no better way to teach someone than teach them real-time.

Tim Bourquin: Yeah. And you’ve mentioned five minutes several times in the interview today. Is that your sweet spot in terms of the time frame? Do you ever go out ten to 15, maybe even an hour in finding opportunities?

Next: Time Frame Sweet Spot

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Wayne McDonell: Are you talking about candles?

Tim Bourquin: Exactly.

Wayne McDonell: Yes. By and large, I trade on the 15-minute.

Tim Bourquin: OK.

Wayne McDonell: But when it comes to news announcements, when the release comes out, the market becomes very volatile and a 15-minute chart is often way too slow. So what I’ll do is I’ll drop down to the five-minute and then identify support and resistance on that. But as soon as I can, I jump back up to the 15-minute chart.

Tim Bourquin: And are you a true daytrader, rarely holding things overnight...if there is such a thing as overnight in Forex?

Wayne McDonell: That’s right. By and large, with the exception of some carry trades, I’m an intraday trader.

It’s kind of like being a commission-only sales person. You’re only as good as your last trade. You know you've got to sit down and earn your daily bread. If you win, you have three seconds to stand up and cheer and high-five somebody, and then you've got to sit down and get ready for the next trade. If you’ve made a loss, you get exactly three seconds to cry yourself a river, and then you've got to get ready for the next trade.

Tim Bourquin: And for those carry trades, are you interested in the interest involved in some of these crosses or whatnot? Or is that not a factor for you?

Wayne McDonell: It’s all about the interest, baby. It’s all about the interest, yeah.

Tim Bourquin: OK. So that has become a significant part of decision making in terms of your trading as well, which a lot of people have. I guess they don’t think about the interest and possibilities too in earning that money, but...

Wayne McDonell: Well, I think that the biggest mistake amateurs make—especially when they’re tinkering around with should they hold that position for an hour, for a day, for a week—they totally forget about that whole interest problem. And they suddenly realize that in some cases, they’re making money.

But more often than not, they realize that they’re losing money. And it could just be trading at the wrong time. I think a lot of amateurs don’t realize that after the London Close, the liquidity in the Forex market dries up, and it’s a terrible time to trade.

But you know what? They’re getting home from work, there’s nothing better to do, they want to play around with the Forex thing, and they start pulling the trigger and seeing what’s happening because they like all the colors on their screen.

And then all of a sudden 5 p.m. New York time rolls over, and wow something happened, and sure enough their broker took them through rollover and they had to pay interest on top of their trade. So they usually learn the hard way.

Tim Bourquin: All right. Well, listeners, you can reach Wayne at FxBootcamp.com. We’ll link it, too, in the show notes.

Wayne, thanks very much for your time today. I really appreciate you sharing some of these trading stories with us and some of the tips as well. I think it was really helpful, thanks a lot.

Wayne McDonell: Thank you Tim. It was a great pleasure.

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