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An initial part of the News Straddling Strategy is to pick out the various market moving announcements that can have a big impact on the currency market. The currency market usually responds violently to the release of US economic data figures. You must not be surprised by this. US is the world’s major trading partner and US is the largest economy of the world. This is the main reason why the US economic news announcements have the greatest potential to influence other countries’ economies and their respective currencies. There is a common saying when US sneezes, the world catches cold.
Inflation, consumer confidence, trade balance, unemployment figure, home sales, interest rate decisions, industrial production, retail sales, manufacturing and business sentiment figures are of significance to the currency market. If these economic data released relates to US or Euro zone, the higher the impact will be. Many economic reports are released once a month. If you want to trade these news releases, you should note the dates on your trading calendar. Other than the dates, you should also note the time of that economic data release. These news releases are usually made around 12:00 GMT or 13:00 GMT. At this time, it is morning in US and the European markets are still open.
News Straddling Strategy is an intraday trading strategy that tries to take advantage of the high amount of volatility that is usually generated with the news announcement. So it maybe more advantageous to focus on the more volatile currency pairs! The most market moving news relates to US, the news straddling strategy should be applied on currency pairs that involve the USD. Some good candidates for this strategy are EUR/USD, USD/JPY, GBP/USD and USD/CHF. Certain currency pairs among the majors respond better than others when it comes to trading major economic news release. The four major pairs ERU/USD, USD/CHF and GBP/USD tend to be better candidates than USD/JPY as the European markets are usually open at the time of US news release. However, the Asian markets where the Japanese Yen is mostly traded are closed by that time.
Moderate to very high price volatility can be expected during the time of the news release. Economic News Straddling strategy is only employed upon the release of significant scheduled news. We can expect to profit from the resulting sharp market moves. You should mostly concentrate on the EUR/USD pair based on its superior liquidity compared to the other major currency pairs for this strategy. This strategy requires fast entry and exit. Currency prices usually respond very quickly in a knee jerk reaction to a move in one direction and may correct themselves very quickly, so you must be very nimble.
News Straddling Strategy depends on the use of a stop-limit order. A stop-limit order is basically an order that becomes a limit order once the currency reaches the designated stop price. At the specific price the stop-limit order becomes a limit order. The stop-limit order will instruct the broker to buy or sell at the specific price only when the specified stop price has been reached. The main advantage of using the stop-limit order is that the trader can decide ahead of time the price at which the trade will get executed in the News Straddling strategy. However, the stop-limit order may not get filled at all. This is exactly what our strategy is. Either we get the price that we want or we dont trade!
The currency price may not stay within the limit range for the order to get executed due to the fast moving nature of the market. Another reason could be there is not enough supply and demand at the price at which the order is to be filled. By placing the stop limit order, we are instructing the broker that the entry price is either filled at the limit price or better. If not possible than the order is not executed at all! It is better that the position is not filled at all if we are not able to trade at the entry price that we want. Using stop-limit order helps us avoid risking slippage.
However some brokers do not allow stop-limit orders on their platforms. Simply look for another broker that does allow it if the broker does not allow the use of stop-limit order. Simple as that! Most often, a horizontal channel is formed prior to the release of the news. The news straddling approach is conceptually similar to a channel breakout strategy. This channel may be identified on the intraday 5 minute or 60 minutes chart.
First draw an upper line connecting the two highest points to form the resistance line. Second draw a lower line connecting the two lowest points, forming the support line. The two lines should form a channel. The channel should be roughly like 40 pips wide. Once you have identified and drawn the channel on the 5 minute chart, monitor it for 20 minutes prior to the news release. A channel basically tells that neither the bulls nor the bears are over enthusiastic about their bias before an important new release.
Name of the game is that we either enter at the price that we want or we completely stay out of the market. Place your entry order not more than a few minutes before the news release. Place a stop limit long entry order a few pips above the resistance level and a stop limit short entry order a few pips below the support level of the channel. For a long entry, a stop sell order is placed at least 20 pips below the resistance level. For a short order, a stop sell order is placed at least 20 pips above the support level. Each stop-limit entry order must be accompanied with a specified stop loss order and profit-limit orders.
What should be your take profit target? The initial take profit target could be equal to the width of the channel. A staggered profit taking could also be considered. You can set your initial profit objective for half of your lot size and you could set profit target equal to the twice the width of the channel for the rest of the position.
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