The only barometer for the risk-on and risk-off world that seems to be working is the Japanese yen (...
Pro-Proven Ideas Any FX Trader Can Use
01/19/2012 3:30 pm EST
Staying safe in volatile, news-driven markets like forex requires adjusting position sizes in high-volatility periods and being careful about trading ahead of news events, says Dan Hwang.
If you’re a forex trader, you know that headline-driven events are always happening, and it affects price actions, so how do you mitigate that risk and protect yourself?
Our guest today is Dan Hwang to talk about that. Dan, I know that in forex especially, it’s by headlines, so how do I protect my account?
Well I think at times when we see price action so impacted by short-term headlines, what we have to do is try to lengthen out our time frame in terms of what targets we’re looking for. What we typically do is try to take our stop losses and lengthen them out a little bit longer.
We’re usually looking at using about 100-pip stops on trades, and we’re now typically looking at 200- to 300-pip stops and taking more of a macro view on the markets.
Alright, so does that mean I should decrease my position size if I have to increase the stops?
Exactly. If you’re looking to manage risk properly and looking to keep risk to 2%-3%, what we should do is take a likewise decrease on our position sizes.
There are unknown events that just pop up of course as breaking news, but then there are the economic announcements. How do you trade around those?
Well it’s hard to determine when these unknown events are going to hit the newswires. What we’re looking to do is actually establish price targets on key technical levels.
We look for tops to form, say, in the euro (EUR) versus the dollar (USD) or the sterling (GBP), and we’ll look for a downside breakout before taking any action.
See related: Trade the News with Less Risk
Let’s say we have non-farm payrolls coming out, if you’ve got an idea which way it’s going to go, will you actually put a trade on before, or will you play the reaction after?
We typically like to wait for the reaction after. I think there is a lot of risk when we get in before the announcement because it’s pretty difficult to determine what non-farm payrolls is going to print.
OK, and then how about on that reaction? I know some traders trade the immediate reaction right after the announcement and some wait for the overreaction and play it coming back.
You know, it really depends on how the number prints. Our outlook is still for the euro to move lower throughout the year. If we do have a positive payroll number and we see the euro start to move higher, what we’ll do is try to wait for the price action to hit that level where we’re looking to enter.
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