My forex trading system - news based forex trading system

In the article I am going to talk about my favorite forex trading system. Anyone who has tried to trade Forex, stocks or commodities for any length of time knows that fundamental news releases are one of the major drivers in the financial markets, but how many traders really know about trading news in forex or any other financial market. If we take specifically Forex market, it is open 24 hours a day and five days a week. There is always some news announcement coming out. If these events move the markets so much it is essential to know how to trade them. Here are some tips for those who want to benefit from trading news releases and breakouts in forex.

Identify the most important piece of news in Forex trading

• To be effective in using this forex trading system you have to follow certain steps. Firstly, when news come out you have to identify which piece of news you are going to trade. On any given day there could be around 5-6 pieces of Forex news coming out that affect certain currencies. You can go to forex factory or dailyfx and see which news is coming on any given day of the week. The sites provide some information on: what the news is; when it is released; what currency is affected; whether it is expected to have low, medium or high impact; and what the anticipated number is. A beginner should choose only those pieces of news which are of high importance. Sometimes news of medium importance also creates big moves in Forex market, but for the sake of not over trading let us leave those aside.

Mark support and resistance levels before forex news trading

• My forex trading system is based on breakouts of support and resistance levels. One cannot undervalue the importance of support and resistance in forex trading. Therefore, after you figured out which piece of news you are going to trade, it is very important now to define support and resistance levels. Support and resistance are places where price came and bounced off. When the time comes you will place a buy above resistance and a sell order below support. Do not place any orders yet.

Choose the best pairs in Forex news trading

• Success in this forex trading system also depends on proper selection of Forex pairs. One has to know which pairs he/she feels comfortable with and trade accordingly. So now is the time to choose which currency pairs have the best support and resistance levels for trading a news event. At the time you look at the charts the price has to be in between those levels, preferably in the middle. The best distance from support to resistance is around 70-100 pips. It could vary depending on the pair you are going to trade. Distance can be bigger for gbp/jpy pair and much smaller for eur/chf pair, because gbp/jpy is much more volatile pair than eur/chf. gbp/jpy can easily move 300 pips a day and eur/chf hardly moves 100 pips a day, even on fundamental news releases.

Place trendlines before news breakouts

• Any technical analyst can tell you how important are trendlines in trading forex and they are essential in my forex trading system. So, when you know which pair you are going to trade take out an essential technical tool and apply it in your charts - a trendline. In fact you will have to place 2 trend lines: one 5 pips below support and one 5 pips above resistance 2 hours before the news announcements. It is not time for any orders yet.

Modify support and resistance levels

• At this stage you can go for a walk and come back to your charts 30 minutes before the news to see if you have to modify support and resistance levels. Maybe they are already broken and the price is beyond those levels. So you will have to readjust them by placing your trendline higher if resistance was broken or by placing your trendline lower if support was broken.

Decide where to place buy/sell, stop loss orders

• So you modify your support and resistance levels and now it is time to decide about placing your sell and buy orders. Sometimes I place only buy or only sell orders as sell area or buy area is too far away. A beginner trader should not put more than one order in one direction (one buy and one sell order). A buy stop order has to be placed 5 pips above your resistance trendline and a sell stop order has to be put 5 pips below your support trendline. At this stage you also have to decide where to place your stop loss order. You should not lose more than 2 percent of your capital on a single trade. It does not matter whether you trade news, day trade or trend trade the maximum loss that you can afford should not exceed 10 percent. If you risk more than that your forex trading experience will be very short and no forex trading system will help you save your trading account.
  

Choose level where to place take profit order

• We are quite close to news release and now it is the right time to figure out where you should place your take profit order. First position should be closed at the nearest support or resistance. Alternatively it can be closed at an even number. Huge hedge funds and mega banks tend to take profit at even numbers, so these levels are very important as they tend to create a lot of volatility and produce a very good chance for you to get out of the market together with big dogs (having some nice profit in you pocket). The second position (if you take two positions in one direction) you can ride as long as the market exhausts itself. And still it is not time to place any orders yet.

Place orders NOW and wait for the news before trading

• Finally, when there are only 3-4 minutes left before news come out, place the order first at the level which is further from the price. If the price is further from resistance than from support, place buy order above resistance first. When you finish that, place order(s) at the level where the price is closer to. If price is closer to resistance you place your buy order after you have placed your sell order below support. And vice versa.

Readjust your stop loss orders

• When the news hits the market one of your orders is opened. What comes next? You should move your stop loss order below/above 15 minute breakout candle as soon as you can. In this way you minimize your risk and maximize profit. Remove the orders that were not opened.

Move your stop loss as the news moves the price

• As the price moves, move your stops placing them below/above 15 minute candles depending on which order (buy or sell) was triggered.

Exit the market

• You either exit the position when your take profit order is triggered or when your stop loss is hit. Stop loss is most probably in the plus zone already.

1. You are able to make money on a daily basis. As forex news come out every day you generally use the system every week. Not all releases are important, so I usually use this system two or three times a week.

2. You do not have to understand economy (fundamentals) to trade the system. You just follow basic technical rules without caring much whether the data that came out is positive or negative. And you do not have to interpret the data. You just go where market takes you.

3. You do not have to predict where the market will go (this idea naturally flows from the second point). Investors that base their trading on fundamental analysis have to predict where this or that particular security will go. It is different with this forex trading system. Market either goes up or down, so when news hits the market you are ready to go wherever market takes you without any prior predictions.

1. Huge volatility can cause your orders not to be executed. Occasionally, there are huge price gaps in the market when news is released. So, if you have placed your stop at a certain level, your order may not be filled, because the price can simply jump through that level. Your limit orders might also not be opened due to these price gaps. (Most brokers boast that they do not have these gaps and all orders are filled. They are lying).

2. Most news releases create only short term price moves and after a few hours prices can come back to the levels that they were before the news release.

3. In order to trade this forex trading system you have to stay much time in front of your computer when news is released. It is due to volatility. You have to be ready to close your order at any time. This could be due to various reasons: no moves when the news is released, choppy price action, after an initial breakout the pair reverses and trade starts going against you and etc.

4. It takes a lot of time to select which piece of news to trade and which pair to trade. Technical analysis of the selected pair also requires a lot of time.

To conlude with I have to warn you that this kind of forex trading strategy can be tricky for a beginner, therefore one should study carefully price action around news events for a few months, test trade this forex trading system on a Forex demo account and only then consider trading it on a real account. Read my other articles about news trading to get a better idea how you can benefit from this kind of forex trading strategy and also visit my Youtube channel to on how I trade Forex market. I will continue updating this hub with more videos that will show you how to use this kind of method. Feel free to ask questions, post comments. I hope that now you know more about trading news in forex.

P.S. Forex trading involves significant risk of loss. You should not risk more than you can afford.